A triple net lease is a commercial lease for which the lessee essentially takes on all the cost of the property in addition to a monthly lease payment. The lessee is directly responsible for paying real estate taxes, property insurance, and all maintenance required during the lease.
In commercial real estate, a critical element to the success of an investment is the lease agreement. The landlord must charge enough through the lease to be viable, but not charge so much that the expenses are cumbersome and reduce the profitability and stability of the tenants.
In a triple net lease, the tenant pays a lower price point for the base lease but is also responsible for their proportionate share of real estate taxes, maintenance, and building insurance. NNN leases create more stability for the landlord because the expenses of the property are shared among the tenants. The lease provides a certain degree of transparency to how the tenant’s rent is attributed to the Properties they occupy. Therefore there are fewer variables.
In a triple net lease, also known as the NNN lease, most risks are transferred to the tenant. Property taxes, insurance premiums, as well as all repairs and maintenance, are not covered by the landlord. Because of that, the rent is usually much lower, but the tenants have to deal with unexpected expenses, such as repairing a leaking roof. While tenants are reluctant towards this kind of agreement, it makes a landlord’s life much easier, as tenants damaging their property are not a problem anymore.
How Do You Calculate a Triple Net Lease?
NNN Leases are calculated by taking the annual property taxes and insurance payments for space or building and dividing that by the total square footage being rented, then adding estimated monthly maintenance costs.
There is more than one way to calculate a triple net lease, but the most common method includes adding the total annual costs of each obligation together (property taxes, maintenance costs, and building insurance). Then with all the obligations accounted for and added together, divide the resulting number by 12 to receive the total monthly expenses.
Start out by adding the annual property taxes and the insurance for the building and then divide that amount by the building’s total amount of rental square footage. Examine your latest maintenance costs and determine whether they are likely to rise within the leasing period.
If you are renting to multiple tenants in one building, you should examine your latest maintenance costs, determine whether they are likely to rise within the leasing period, and also consider the cost of upkeep related to common areas such as bathrooms, hallways, and the building lobby. Figure out the annual costs for cleaning, utilities, and necessary supplies. Take the number of annual costs and divide it by the total number of rental square footage in the building. Finally, take all these fees and add them to the annual rent. You can divide that figure by twelve to determine the monthly rate. Typically, NNN leases will spell out how the landlord arrived at the figure.
In a single-tenant building, the process is fairly simple. All you need is to simply add the total monthly expenses to the monthly rental rate to determine the total a tenant can expect to pay each month on a triple net lease.
Commercial leases are quoted in two separate parts: rent and operating expenses. Tenants will be quoted a price per square foot for operating expenses as well as the agreed-upon base rent. For example, a space may be quoted as $5000 per month plus $20 per square foot in NNN costs.
As informed investors we should understand the risks associated with real estate investing and that there is no guarantee. Please do your due diligence.
