Real estate is a field that has blown up in recent years, with billions of dollars invested and thousands of different companies to choose from. But, even with so much variety available, there are still different types of commercial real estate leases and clauses to consider. One type, in particular, is the triple net lease agreement.
To understand triple net leases and why they are so advantageous to tenants, it's best first to understand what a lease and a net lease are. A lease is an agreement between two parties (a landlord and a tenant), which sets forth the details of the relationship between parties, covering many aspects of the relationship: ownership, use, maintenance of common areas; responsibility for repairs; even responsibility for taxes.
A net lease is a lease agreement in which the tenant becomes responsible for all the property taxes, insurance, and repairs that the tenant requires to own, operate and maintain its net lease property. On the other hand, a Gross lease states that the landlord is responsible for all these expenses, and the tenant must pay a base rent. Gross lease agreements are much less common.
Modifies gross lease agreements do exist, in which the tenant pays a base rent, and the landlord is responsible for taxes and all other expenses. In order for the tenant to be granted a net lease agreement, it must meet certain criteria in terms of financial solvency. Real estate financiers and lenders prefer that the tenant have a net lease agreement if possible because it reduces the risk to them.
Understanding a net lease, then, is key to understanding a triple net lease. A triple net means that the tenant will be responsible for everything that makes the building a functional building and a usable property. The tenant pays the first dollar of a triple net when he actually purchases it; this is called carrying cost. When a net lease is available, this allows for a lower initial cash outlay by the tenant and thereby a lower interest rate.
Net leases are often considered as a business investment and are usually used for retail spaces, industrial buildings, medical offices, nursing homes, and other commercial properties. Maintenance expenses are the responsibility of the tenant, and the landlord is not responsible for these expenses unless they are a direct result of landlord negligence.
Since a net lease amounts to more responsibility on the part of the tenant, landlords can demand higher rents to offset their risk. Same property , if leased on a gross lease, would likely be considered as a lower-quality investment. A net lease will have a more favorable rent and will make the investment more attractive to lenders, developers, and investors.
Not only will a net lease reduce the landlord's risk of loss, but it will also reduce the tenant's financial and management exposure. If the net lease is properly drafted, the tenant will only have to compensate for abnormal expenses , which are usually those that are not consistent with normal use of the property.
Types of Net Leases
There are three main types of net leases:
1. Single Net Lease
2. Double Net Lease
3. Triple Net Lease
Single Net Lease
A single-net lease is the most popular type of net lease. The tenant pays all real estate taxes, insurance, and maintenance. Monthly cost is usually equal to one month's rent, plus taxes and insurance. A net lease of this type is typically used for small office buildings, medical offices, retail spaces and warehouses. Real estate financiers and lenders prefer single-net leases over net lease agreements because it reduces risk.
Double Net Lease
This type of net lease involves the tenant paying real estate taxes, but the tenant gives up most of its maintenance responsibility (rental fees). For a double net lease to exist, both parties must agree and sign an agreement stating such. The landlord can provide janitorial services at their own expense. Real estate financers and lenders prefer this type of net lease more because it increases their potential income.
Double-net leases tend to be cheaper than triple-net leases and are most often used by companies with small office buildings. The tenant is responsible for the taxes, but the tenant still bears most of the responsibility in a triple-net lease. The landlord will be responsible for all repairs, except those deemed fair wear and tear, and must be maintained by the tenant. The landlord must also pay for insurance on behalf of the tenant.
Triple Net Lease
What is a triple net lease? This difficulty is often heard by new property managers or is tossed at them by unrealistic tenants. A triple net lease is a form where the tenant must maintain the building's utilities and pay for all upkeep and maintenance costs. A triple net example would be if a tenant wanted to rent an office space and the lease included an option to renew, where the tenant would pay a monthly base rent, along with all the other fees.
Triple net leases are agreed upon by both landlord and tenant, and they are an agreement of contract like any other lease. Responsibilities fall on both parties to insure the property is maintained and not destroyed by either party. All leases should be in writing, and all parties must adhere to the contract. A triple net lease nnn has two or more parties that must agree to a contract before it can become legally binding.
A triple net will hold a tenant responsible for all the costs that are necessary to maintain the building. A triple net lease at best demonstrates the importance of tenant retention when looking for a property for rent. Moreover, a triple net would prove to be the most beneficial to landlords and credit fixers, in that it prevents tenants from walking away from their leases
Triple net leases are usually more expensive than single net leases and most often have higher risk involved. A triple net is less common at first glance because of its high costs compared to other net leases. However, a triple net is a great option for tenants who are considered high-risk, such as those that have negative credit.
Some institutions have strict clauses that may limit the length of time the tenant will be able to remain on the property. For example, many landlords require that tenants sign three year leases. A triple net lease nnn is a complicated lease form that requires careful attention to ensure an optimal result for the tenant. Nonetheless, it is the landlord's responsibility to guarantee reasonable living conditions are met.
Net lease in the United States differs from Triple Net Lease which is used in Canada. Triple net lease was first used in Canada where the landlord does not have to pay for any utilities (such as electricity), but the tenant does in exchange for a lower rent than triple net. A comprehensive net lease may have a combination of both single and triple net clauses.
The triple net clauses in Canada can be the same as their American counterparts, and the two forms of leases can be virtually interchangeable; however, a difference lies in how payments are to be made. A triple net will have a paid in full clause that is used to pay all money due on a given date.
A triple net lease example: A landlord enters into an agreement with a third-party tenant at the beginning of their property occupancy. In this agreement, the tenant is responsible for all material costs, including utilities and taxes, security deposits, and repairs. The landlord pays all the property taxes. The tenant, who pays no taxes, insurance, and maintenance fees, pays only a base rent.
Base rent refers to a fixed rate of rent the tenant pays the landlord for the use of the property. Base rent is expressed on an annualized basis and typically includes all operating expenses and property taxes paid by the tenant. Lower monthly rent is usually accompanied by higher monthly operating expenses as part of the compensation to the landlord.
Lower monthly base rent may not have all the expenses included, but will have a higher base rent. It is important to understand the base rent is not a fee paid to the landlord for use of the property at the tenant's expense. The base rent is stated as a percentage of gross revenues of the property.
Pros of Triple Net Lease
1. Triple net lease gives a tenant a greater incentive to make improvements and invest in the property.
2. Since a triple net lease is more of a legal agreement, it's easier for tenants to fight over responsibilities
4. Allows the landlord to offer a higher gross rent for a property below market value.
Cons of Triple Net Lease
1. Triple-net lease companies can raise the base rent rather quickly due to the extra factors taken out of the mix for operating costs.
2. Landlords are reluctant to make such a significant commitment, but a triple-net will give them peace of mind.
This lease is usually applied to income properties such as retail, office, or industrial buildings. In such a NNN lease, the tenant is obligated to pay for all the ongoing expenses regarding premises management (property taxes and insurance) and maintenance and repairs. Triple net allows a tenant to pay less rent and still have a total responsibility of all expenses.
NNN lease may be a good option for new businesses with limited capital. Also, it is useful for tenants who do not want to spend money on repairs and maintenance. Operating expenses of NNN leases are usually lower than triple net lease. Real estate investors, who plan to purchase income property, may consider such a lease. Net lease (triple net) is a low risk option for less experienced investors because the tenant assumes all risks.
NNN leases may be also considered as a good choice by tenants who are less than credit worthy, since they will not be able to get another commercial property lease without good credit. A triple net may attract tenants that are reluctant to commit to long-term leases, especially if they have a history of poor credit.
NNN leases are usually more expensive than triple net and are often confused with triple net. The main difference between them is that a triple net has two parties that need to agree upon a contract before it becomes legally binding (such as in the case of a lease for a rental property) whereas NNN lease is an agreement between landlord and tenant where the landlord has no obligation. Close related to net lease, NNN lease will be most commonly used by small-time landlords who have no real estate experience. Some of these landlords may not have any experience in marketing, negotiating, or assembling all the services they need to operate a property.
Lease rate in the NNN lease is not the base rent. Rather it's the net figure that takes out operating expenses and provides a certain level of comfort for the tenant. Single tenant occupancy is not allowed under the NNN lease, nor is it possible to sublet or assign the occupancy.
Absolute Net lease
An absolute net lease is a commercial lease in which the tenant pays all maintenance and repair costs. The tenant is responsible for paying all insurance and property taxes. In return, the tenant enjoys a guarantee that the landlord will perform or pay for any repairs deemed essential. The landlord receives a fixed amount of base rent determined by an existing formula in an existing lease agreement.
Net leases of any kind are more complex structures, requiring the tenant to pay for certain items and the landlord to pay for others. Real estate industry professionals must understand the different types of nets, as well as the legal processes that apply to each one. Net leases are not the most common form of commercial lease. However, for tenants who are in dire financial straits, a triple net can be a tempting prospect as well as an excellent opportunity.
A net lease compared to a triple net on a new building is typically less expensive. The reason is that the longer term of the triple net allows for a landlord to put up money at the conclusion of the lease and make back enough from the fixed base rent to cover their investment.
Triple Net Lease Investments
Triple net lease investment in real estate, primarily commercial real estate, has been a popular investment option for decades. Relatively low risk, with a steady income and the ability to make profits through appreciation, a triple net lease is an ideal investment for those seeking a certain level of security. Triple net leased properties can be commercial properties ranging from undeveloped land to strip malls, or they can be existing structures.
Triple net lease investments require tenants who own real estate to rent it out to pay for all operating expenses, including real estate taxes, utilities, repair, and maintenance costs. The landlord is responsible for paying all insurance, but the tenant is obliged to pay property taxes. A triple net in many instances is a hybrid model, combining a triple net lease with other types of lease agreements. Triple net is usually not a complex financial contract and can be understood by even a layman since it includes only two parties: tenant and landlord.
The tenant is the landlord in a triple net lease, responsible for all property maintenance and repair costs. The landlord will be responsible for all services and upkeep necessary for the tenants of that building.
Property management companies are responsible for any facility maintenance, costs associated with the operation and upkeep of the property, and operating expenses.
Building insurance is typically one of the first expenses the property manager must meet since the costs can be pretty expensive and often require immediate attention.
This insurance is generally a costly investment for landlords, partly because of the immense potential liability losses. Net lease property managers are responsible for providing insurance coverage similar to the landlords but with a higher deductible.
The cost of building insurance depends on several factors. These include:
—The frequency and extent to which the building is used by tenants and tenants' guests, such as events, meetings, dinners, or receptions;
—The overall condition of the building;
—The age and construction type of the building (structure).
Property insurance can cover losses due to fire or other disasters, damage to buildings caused by earthquakes, hurricanes, or floods, and damage to buildings caused by industrial accidents and vandalism. It covers the vast majority of property risk in the event of loss or damage to the property. Typically, there are three types of insurance:
Building and Personal Property Insurance
This covers your buildings and personal items while in the building.
Personal Liability Insurance
This is coverage for injuries to your tenants, guests, and any employees at your site.
Bodily Injury & Property Damage Insurance
This is coverage for injuries to your tenants, guests, and any employees at your site.
Commercial Real Estate
Commercial real estate is any privately owned real estate used for nonresidential purposes. A commercial property in today's real estate market may include a myriad of tenant spaces. Commercial property includes everything from office buildings to retail and industrial properties. Lease negotiations for commercial real estate can be complex because of the many types of structures and the number of different commercial real estate leases.
Paying rent on commercial real estate is another major expense for the landlord. The rent covers the property taxes, utilities, and maintenance of the building's infrastructure. Triple net in commercial real estate still applies, but the landlord can charge a higher rent for the same space and have the tenant cover all of those expenses.
Under a triple net lease, tenants have the ability to increase rent on commercial real estate when property values go up. This is known as capitalization rate (cap rate) and will depend on the risk associated with the particular piece of property. A particular property might appreciate at a higher rate than another piece of property.
The triple net can include all operating expenses for water, gas, electricity and other utilities associated with a commercial building. The landlord responsible for repairing and maintaining all aspects of a commercial property should also be responsible for any utilities used in the building.
Lease structures can range from simple fractional, total service leases to complex triple net leases (NNN) to specialized triple net leases for specific real estate types such as auto malls or movie theaters. Lease structures are generally structured as gross or modified gross leases to reduce the responsibility of the tenant in case of a financial default.
Commercial triple net leases may also be used for single tenant office buildings, multi-tenant office buildings, shopping centers, industrial and even warehouses. What is common to all commercial real estate leases is that they have the same essential components:
—The name and address of the property owner.
—The names and addresses of the tenant(s).
—A brief description of the property, including its location and square footage.
Gross leases are the simplest type of lease. This type of lease entails the owner doing all the work, taking out all the expenses, and paying any tenant a fixed amount (usually a nominal rental). This is a common form of lease for retail or office space and is considered a low-risk investment for investors who want to invest on their terms.
Modified gross lease is similar to modified gross rents (often called gross rents with escalations) but includes an increase in rent after the first year. Gross leases with escalations are commonly used for shopping centers, restaurants, and retail. In these leases, the tenant's revenue is tied to a fixed amount of revenue for the first year.
A triple net has a requirement that the tenant covers all expenses of the property. This particular lease is a more difficult one for the landlord to manage. Triple net leases are commonly used in shopping centers, restaurants, industrial properties and even warehouses.