Net Lease Options, What does Triple Net Mean?
By: Kevin Jones, REALTOR, RENE, BBA
One of the most common questions that I receive as a Commercial Real Estate Broker in Wisconsin relates to Leasing Language, NNN, NN, N, Modified Gross Lease, Gross Lease....What does it all mean!!! Below is a simple explanation of the different lease options available to a business owner looking to expand, relocate or downsize.
Keep in mind EVERYTHING is negotiable and it is recommended that you contact an experienced local professional in the area of your search. Out of town brokers, residential specialist trying to practice commercial real estate or 1st year sales reps should all consider teaming up with a local experienced expert in that commercial real estate market before leading their client into an offer to purchase or lease terms.
What is a 'Triple Net Lease'A triple net lease is a lease agreement that designates the lessee, which is the tenant, as being solely responsible for all the costs relating to the asset being leased, in addition to the rent fee applied under the lease. The structure of this type of lease requires the lessee to pay the net amount for three types of costs, including net real estate taxes on the leased asset, net building insurance and net common area maintenance. This type of lease can also be referred to as a net-net-net (NNN) lease.
DEFINITION of 'Double Net Lease'An agreement in which the tenant is responsible for both property taxes and premiums for insuring the building. Unlike a single net lease, which only requires the tenant to pay property taxes, a double net lease passes more expenses along in the form of insurance payments. The landlord is still held responsible for structural maintenance expenses. Each month, the landlord receives the base rent plus the additional payments. Double net leases are most commonly found in commercial real estate.
DEFINITION of 'Single Net Lease'A commercial real estate lease agreement in which the tenant is required to pay property taxes in addition to rent. A single net lease is a form of pass through lease in which taxes associated with the property become the responsibility of the tenant instead of the landlord. The landlord is responsible for the other operating expenses incurred of the property.
What is a 'Modified Gross Lease'A modified gross lease is a type of real estate rental agreement where the tenant pays base rent at the lease's inception but in subsequent years pays the base plus a proportional share of some of the other costs associated with the property, such as property taxes, utilities, insurance and maintenance. For example, under a modified gross lease, a property's tenants might be required to pay their proportional share of an office tower's total heating expense.
What is a 'Gross Lease'A gross lease is a type of commercial lease where the landlord pays for the building's property taxes, insurance and maintenance. A gross lease can be modified to meet the needs of a particular building's tenants. For example, a gross lease may require the tenant to pay the utility bills.
A gross lease allows the tenant to pay one flat fee in exchange for use of the property. The property owner is responsible for much of the associated fees associated with property ownership, such as property taxes and building repair costs, and may be responsible for certain use-based costs, such as standard utilities.
When determining the rental fee for a gross lease, the property owner can take into account all of the costs associated with the property and create a suitable monthly rental amount based on that information. The tenant is paying a fixed monthly fee that can cover a wide variety of expenses being handled by the property owner.
Gross Lease Risks and BenefitsA gross lease may actually cost a tenant more than if the property was associated with a net lease. Since the rental fee is based off of an estimate of the associated costs, created solely at the property owner's discretion, the property owner may overestimate the costs and pass that to the tenant as a higher rate. The benefit is that the exact cost is known from month to month, regardless of usage.
Net leases may allow tenants more control over certain costs and aspects of the property, but they come with a higher level of responsibility. If the tenant agrees to handle maintenance, the tenant may be able to make certain aesthetic changes to the property, such as selecting paint colors or landscaping, but the tenant will also be responsible for any necessary repairs. The tenant can also use discretion in keeping utility costs lower but will have to adapt if those costs rise unexpectedly.
-Definitions Sourced From Investopedia 2016