Renting out space whether it is for residential or commercial requires a lease agreement. There are some major differences between a commercial lease and a residential lease to be aware of before renting out a commercial space, however. A commercial lease will be more flexible than residential, but will often have more conditions and go farther in depth. Many commercial real estate landlords create a specific type of commercial lease called a triple-net lease (sometimes referred to as a triple—N lease or a NNN lease) so that it’s agreed on, and in writing, what rental expenses the landlord will pay for and what rental expenses the tenant will pay for ahead of time.
What is the Tenant Responsible for Under a triple-net Lease?
A triple-net lease means that the tenant is responsible for all three “nets” of the rental. A “net” is considered a non-rent expense. Throughout a lease, you will have to know what nets you are responsible for before the payments come up. Understanding what is encompassed by these nets and the jargon and conditions in the triple-net lease will help you be prepared and make sure there are no unexpected expenses for the tenant or landlord. This is where having a lawyer look over the lease or write the lease is beneficial.
There are a total of three categories that the nets fall under and a triple-net lease requires the tenant to pay for each of these nets:
- Insurance: Any space rented will need to have property insurance and with a triple-net lease the tenant will pay those premiums
- Building Maintenance: An inspector should be able to tell you what repairs are needed in the space as well as preventative maintenance that is needed. Even under a triple-net lease, the landlord or investor will typically be responsible for large structural damage repairs.
- Taxes: All property will require someone to pay property taxes. In a triple-net lease, the tenant will pay all or some of the property taxes. Typically, if the space being rented is an area out of an office building, each tenant will only pay a portion of the property tax for the building.
Benefits of triple-net Lease for Tenants
When adding up expenses, it can appear that a triple-net lease is not as good for renters as some other options, but triple-net leases generally have much lower rental rates. Other rental agreements that do not include the ongoing expenses have the expenses already factored into the lease agreement and still includes less freedom for the tenant.
The other large benefit of a triple-net lease is that tenants have much more say in what their space looks like and how it is maintained. If a tenant wishes to remodel or change aspects of the property, they typically have the liberty to do so under a triple-net lease. In a commercial lease, this lets the business tenant have more control over their client’s experiences.
Benefits of triple-net Lease for Property Owners
A triple-net lease is more clearly beneficial for property owners than it is for tenants. Because the majority of non—rental expenses are assumed by the tenant, the act of making income off of real estate becomes less risky. Insurance and taxes generally remain steady throughout the year but can experience changes due to events beyond the control of anyone who entered the lease agreement. Events such as a city raising taxes or filing a claim on the insurance could cause these costs to increase. As a property owner with a triple-net lease, you do not have to assume these increasing costs while the lease term is under effect.
The more unpredictable cost that will be assumed by the tenant is the ongoing property maintenance. While an inspection prior to the rental, will give insights into the potential costs there are often unforeseen maintenance needs that pop up throughout the year of an agreement. A triple-net lease lets property owners have more consistent reliability in their annual income.
In conclusion, triple-net leases can be favorable to both tenants and property owners in commercial settings. With the tenant assuming all three nets of insurance, maintenance, and taxes they are given more control over space, and property owners can depend more on income from the property annually. Unlike some agreements, triple-net leases are highly negotiable. We recommend you consult with an attorney before signing a triple-net lease and deciding with them if there are terms it would be beneficial to negotiate for your business.