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.
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.