What is the Tenant Required to Pay in a Triple Net Lease?
Any investor purchasing commercial real estate abroad and not only is interested in reliable tenants and long-term relationships with them. But, at the same time, an essential parameter of the object is the type of lease agreement in place. It determines the number of expenses that fall on the shoulders of the tenant. And in this article, you’ll learn what a tenant has to pay in a triple net lease.
Types Of Net Leases
In contrast to the net lease, the investor prefers the net lease when the landlord assumes the most operating costs. And first, consider what net lease is and its varieties. A net lease is the type of lease in which the tenant is responsible for maintaining the facility. In this case, he assumes the cost of maintenance, repairs, insurance, taxes, etc. In addition, the tenant pays the rent.
The net lease agreement is the most common in commercial and industrial real estate markets. Depending on the number of financial obligations that the tenant assumes, net leases fall into three groups:
A single net lease (N lease) is a lease that requires the tenant to pay taxes on the property in addition to rent. This type of lease is rarely used.
A double net lease (NN lease) is a lease agreement in which the tenant is responsible for N lease payments and real estate insurance.
A triple net lease or triple net lease (NNN lease) is the contract under which all the costs of maintaining the facility are the tenant’s responsibility. He pays for taxes, insurance, repairs, and maintenance of the property.
Briefly On NNN Benefits
Of course, the purchase of the NNN lease real estate already in the lease gives the investor several advantages over the acquisition of, for example, a house. These advantages include:
✔️ A long-term relationship.
The tenant has already chosen in favor of a particular property and intends to use it for many years. The investor receives the property and has an established relationship with the tenant(s).
✔️ Stable income with minimum worries.
The investor knows the level of profitability of the commercial facility and the amount of regular financial income in advance. In this case, all of the unforeseen costs are on the shoulders of the tenant.
✔️ Freedom of movement.
The estate owner is not interested in being in the same town as the facility since the tenant is responsible for its maintenance.
✔️ Opportunity to attract co-investors (co-tenancy).
Multiple investors can acquire commercial property that already has a tenant(s) at once.
Issue Price For Tenant
If the tenant occupies a single unit, the costs of maintaining the property are entirely under his control. It is not necessary to own the property. And now to the question of price: the tenant pays the costs of maintaining the premises and receives a tax break on property taxes. At the same time, the base rent is significantly reduced.
According to the agreement, if more than one tenant occupies the property, the rental costs are shared between them. This arrangement is beneficial to both tenants and landlords interested in a long lease term.
Multi-tenant buildings imply a more complicated distribution of costs. For example, insurance, taxes, rent, and even maintenance can be allocated by square footage occupied, with an additional allocation to common areas. But some costs, such as utilities, may be used by tenants at different rates, and payment allocation adjustments may be necessary.
Some tenants are most successful at triple net leases. However, stable businesses are most often the best candidates for long-term leases. Good candidates for triple net properties in visible locations include:
Stores
Medical clinics
Grocery stores
Popular retail chains
Gas stations
In general, triple leases are beneficial to tenants because they allow them to pay their fair share of construction costs, and depending on individual use, some tenants may save on costs compared to a gross lease. However, this type of lease also comes with risks because the tenant is fully responsible for the costs. Thus, tenants may want to consider negotiating the cost limit into the net lease structure, especially if the building is older and may need frequent repairs.
Landlord’s Area Of Responsibility
Naturally, the landlord has his share of responsibility in the matter of a triple net lease, although, in general, he gets vast benefits from such a deal, namely:
Most triple net leases offer guaranteed long-term employment, eliminating the risks of vacancy and the costs of finding and qualifying tenants.
NNN leases typically last at least 20 years, which is a reliable source of income for the investor, facilitating financing. In addition, landlords have few property management responsibilities and can use their time and energy for other investments.
Landlords usually retain the right to sell the property (although tenants maintain the right to rent and are protected from eviction) during the term.
Now we come to a question that probably worries many people: does the landlord have to pay for anything? In some situations, he is obligated to do so by agreement. For example, in many three-party leases, the landlord is responsible for major or structural repairs: structural maintenance and parking. As a result, a triple-net lease usually defines who is accountable for everything more precisely.
Summing Up
Triple leases are one of the most common commercial leases. It charges tenants a base rent, and then tenants are responsible for paying their utilities and cleaning costs and their share of property taxes and insurance. The base rent on a triple net lease is often a lower cost since the tenant is responsible for all related expenses. Regardless of what type of rental structure the building uses, it is a contract, and contracts are negotiable.
With so many lease clauses, you are likely to find compromises or concessions that will lead to a signed deal and an amicable relationship that will last for a multi-year lease. As always, it is wise for tenants to consult with a tenant representative broker and a professional attorney when drafting and negotiating the lease terms of the property.
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