Triple Net Lease Form- Why Would You Sign One?

A “net” is an expense related to the lease. A “triple net” lease will refer to the three “nets” of commercial real estate leasing- real estate taxes, property insurance, and common area maintenance, or CAM (sometimes referred to as OpEx, or operating expenses). The triple net lease form is not a completely hands-off experience for Landlord, and it’s not owning the property in all but name for Tenant, either. Both parties must negotiate the triple net lease form carefully to set expectations, and downloading and signing a triple net lease form that isn’t tailored to your situation can create disastrous results.

Attraction of a Triple Net Lease Form

The triple net lease form (or NNN lease form) is attractive to Landlord- it’s guaranteed rental income while Tenant pays the NNN expenses.  It’s attractive to Tenant, too- a long-term lease, lower rent and flexibility with the building, since there’s no capital investment to purchase the land.

It Can Get a Little Tricky

A triple net lease is easier if there is a single tenant occupying an entire building.  If Landlord has multiple tenants and shared facilities or common areas, then the accounting and applicability gets more involved.  Tenant should contribute Tenant’s Proportionate Share of the NNN expenses to Landlord, and Landlord is responsible for using that money to make the payments for the insurance, tax, and operating expenses. Tenant’s Proportionate Share is based on how much space is occupied in relation to the property as a whole.

When you’re negotiating your triple net lease form (or, rather, you’re working with your professional team to protect your interests and mitigate your risk), focus on these three triple net expenses and how each party will approach them in negotiations:

Insurance

Tenant pays for all or a portion of the insurance cost on Landlord’s property. Negotiate this section carefully:

  • Coverage should be adequate
  • Insurance company should be properly qualified, not just the lease expensive
  • Make sure Landlord is informed of coverage changes/lapses
  • Tenant should have to report/file a claim with a claimworthy event occurs

If Tenant doesn’t meet the insurance requirements, Landlord can default Tenant under the lease, but meanwhile, and pursue remedies that way, but meanwhile, there’s damage and no money to fix it. Also, if Tenant violates the insurance (like arson), then there’s no coverage, even if Landlord is listed as additional insured.

CAM/OpEx

This section should be highly negotiated in your triple net lease form, especially if this is a multi-tenant location.  Be very specific about what expenses are included, and excluded, from CAM or OpEx. Negotiation tip: watch for capital expenditures, insurance charges as part of CAM if already paid as a separate charge, and maintenance contract requirements.

Landlord should be very clear on the maintenance requirements and quality of work that Tenant is responsible during the Lease term.

Taxes

Who can protest the tax bill?  If no one protests it, and taxes increase more than those of comparable properties, Tenant is stuck with a higher bill, and Landlord may have difficulty finding a new tenant at the end of the lease term.

A triple net lease form involves a lot of negotiation and understanding the long-term consequence of those negotiations. Getting a form online won’t provided the customized solution necessary in this complex Landlord-Tenant relationship.  It’s important to have an experienced team in place to guide you through the process of negotiating a triple net lease form.


Disclaimer:

This article does not create an attorney-client relationship. This article is for general education purposes only and is not legal advice. You should consult with a qualified attorney before you rely on this information.

Is a Triple Net Lease Agreement Right for You?

Understanding the difference between a triple net lease agreement and other types of lease agreements.

A triple net lease agreement (it could be written as net-net-net, or NNN, lease agreement) is a common commercial real estate lease structure. A “net” is term for “expense” and the “triple” part defines the three most common shared commercial real estate expenses: real estate taxes, insurance, and operating expenses.

In pretty much any lease situation, Tenant will pay its rent, the cost of the utilities it uses, and taxes on its personal property. The rest should be negotiated, depending on the type of lease agreement.

Absolute Triple Net Lease

Just because it’s called a triple net lease, doesn’t mean it actually is one. In an absolute triple net lease, the Tenant is responsible for all of the NNN expenses. This is more traditional in a ground lease situation, or if Tenant is exclusively occupying the entire premises. In a shopping center or large office building, it’s more likely that Tenant will pay a portion of the NNN expenses, along with all of the other tenants. Negotiation Tip: Watch out for repairs and replacement, especially structural ones and who is responsible for them.

Proportionate Share Triple Net Lease

In this lease triple net lease agreement structure, Tenant should pay its Proportionate Share of real estate taxes, Landlord’s insurance, and common area expenses (or operating expenses). If the lease isn’t negotiated properly, then Tenant is likely paying more than its fair share. The Landlord is responsible for the making sure the payments are made for the real estate taxes and its insurance on the property containing the building, using the funds collected from Tenant and other building occupants. Landlord should also maintain and repair the building and the property, so that it’s safe for everyone to use. Check out my post on Tenant’s Proportionate Share to learn more.

Gross or Full Service Lease

This is pretty popular in an executive suite or co-working situation. All of the expenses (real estate taxes, Landlord’s insurance, operating expenses, even utilities) are rolled into the cost of the rent. Tenant pays one amount every month to Landlord, and Landlord pays all of the bills. Tenant will probably pay a premium rent for the convenience of this arrangement, but it’s a good situation for an all-included arrangement.

Percentage Lease

Tenant will pay the non-rent charges per the agreement (absolute NNN or Tenant’s Proportionate Share), and will report its sales to Landlord, usually on a monthly basis. Tenant will then pay a percentage of the money it collects on its sales to Landlord as additional rent, with an artificial or a natural breakpoint.

  • Artificial Breakpoint: A stated dollar amount (example: 5% of all sales).
  • Natural Breakpoint: divide base rent by the percentage (example: 5% of sales over $50,000). A natural breakpoint means that the Landlord should receive its percentage rent only if there enough sales to pay the minimum rent.

Percentage rent can be part of a triple net lease agreement or a full-service lease agreement. Landlords like this arrangement for retail or restaurant tenants, but it’s not as typical for a service-oriented Tenant. Negotiation tip: Define sales as merchandise that is bought and paid for at the location, and exclude online sales with in-store fulfillment and services.

This article does not create an attorney-client relationship. This article is for general education purposes only and is not legal advice. You should consult with a qualified attorney before you rely on this information.