What You Need to Know About Triple Net Leasing (NNN) for Commercial Properties

Are you looking for property for your business? Leasing, instead of buying, is a great option. That’s why understanding the NNN lease, which is becoming prominent, is so important.

Commonly referred to as NNN or triple net leasing.

At first, it can be confusing. We’ve connected with businesses that remember turning away opportunities because they didn’t understand it. But it’s actually simple. Once you read this guide, you’ll go into your next lease agreement with the knowledge of an expert.

What is an NNN?

Triple net leasing has three components. But first, let’s clarify that it's a lease just like any other. A tenant under NNN is expected to pay their regular monthly rent. The only real difference between an NNN and a gross lease is the transparency of what you are paying for and limitations on those charges.

At its core, an NNN requires tenants to pay operating expenses separate from base rent instead of packaging it in with one lump payment. It is usually considered an absolute lease. Remember, this might not be the case, so it’s important to understand what your lease says about these operating expenses and what, if any of them, they will be paying for.

For example, if the building is fairly new, you can probably count on paying everything that could be categorized as an operating expense.  But if it’s older, often some of these expenses are already figured into your base lease rate. 

Here are the three “N”s to a common NNN:

1. Building property taxes. These don’t get released by the county until April, so how they are estimated is really a crap shoot.  They should make up the vast majority of these pass-through expenses.

2. Building insurance. This is the insurance for the building and common areas.  It covers replacement and liability.  It is not insurance to cover your business, guests, or any damage you may potentially cause.  You still have to carry an insurance policy for your business, which the owner will need to be named in and receive a copy of.

3. Maintenance and repairs or common area maintenance. This is going to cover most other expenses having to do with maintaining the property.  These can be direct or simple charges for savings accounts that will pay for less frequent charges. 

All these are expected to be paid during the term of the lease. Assuming you occupy the building with other tenants, these costs will be divided between you, so you will be paying your pro rata share based on square footage.

Like any lease, some of these expenses can be up to the owner’s discretion, so it's important to make sure you are totally clear on what is included before comparing different properties and the rates. 

These are estimates.  They are not actual incurred expenses. Some properties will under quote their NNN charges to get you into the agreement then send you a large bill at the end of the year.

An effective way to combat this is to ask for details of the NNN estimated break down. The largest portion will be property taxes, which you can then check here.  Figure out your share to see if their estimates are near what they should be.

In general, all expenses are passed on to the tenant under NNN terms.  In a ‘Single Net’ or ‘N’ lease all the expenses are included in the rent rate except property taxes, which get paid separately.  ‘Double Net’ is similar, but just a step further.  In this scenario, all expenses are included in the rent rate except property taxes and insurance.  

How Did Triple Net Leasing Happen?

As real estate finance began to evolve, financiers began requiring more risk-averse arraignments and both tenants and property owners became gradually more sophisticated, their attitudes toward risk and transparency evolved. 

Under a ‘gross’ lease, when the owner demands rent increases, the tenant wants to know why not to mention why it was at the rate it was in the first place. 

Under the NNN arrangement, the process and expenses are transparent enough for everyone to be able to pinpoint where the increases are coming from.  The financier and owner are pleased because their exposer is limited by passing along all increases in expenses to the tenant.

Can You Avoid Those Charges or Limit Exposure?

Likely not.  And it may not necessarily be in your advantage.  An often misconception is that ‘NNN’ charges increase the overall rent rate compared to a ‘gross’ agreement.  The fact is, these expenses are going to be passed on whether through a transparent process like the ‘NNN’ agreement or a ‘gross’ agreement where it’s all lumped together. 

Each NNN depends on the contract that is presented to you. But one of the benefits owners get with a NNN agreement is that their tenant will be more conscious of how they take care of the property and what they pay attention to.  These cost savings are passed on to the tenant. 

As an example, if a sprinkler head was broken and spewing water, it’s in the tenant’s best interest to notify the owner, because the tenant will be paying their share of that water bill. 

The Upside of NNN

There is a reason why NNNs are growing. They lower the risks for owners, lien holders, and to a certain extent, tenants.

When you have a NNN agreement, your total cost of rent (if the owner and manager are diligent) tends to be lower. As a tenant, you are investing in and supporting the operating costs of the building. You are also more likely to take care of the building, which may help lower your total cost since owners can trust you like partners.

Understanding how NNNs work is an important step when finding the right lease for your business. At Austin Commercial Rental, we connect owners and tenants so that people like you can find the best and valuable space that promotes growth for their business.

If you would like to find or lease out properties in the Austin area, you’ve found the right place. Start today