The Triple Net Lease: Volume 2.1
A triple net lease (NNN lease) is a commercial real estate agreement where the tenant agrees to pay all the expenses associated with the property in addition to the base rent. These expenses typically include property taxes, insurance, and maintenance costs, hence the term “triple net” – referring to the three additional costs beyond the base rent. Let’s break down each component:
1.) Property Taxes: In a triple net lease, the tenant is responsible for paying the property taxes associated with the leased space. This means they must cover the taxes levied by the local government based on the assessed value of the property. For example, if the property tax for a commercial building is $10,000 per year, the tenant would be responsible for paying this amount in addition to the base rent.
2.) Insurance: The tenant also bears the burden of insurance costs under a triple net lease. This typically includes property insurance to cover damages to the building and liability insurance to protect against accidents that may occur on the property. For instance, if the annual insurance premium for a commercial space is $5,000, the tenant would need to pay this amount on top of the base rent.
3.) Maintenance Costs: Maintenance expenses, including repairs and upkeep of the property, are the responsibility of the tenant in a triple net lease. This can encompass everything from routine maintenance tasks like landscaping to major repairs such as fixing the roof or HVAC system. For example, if the annual maintenance costs for a property amount to $7,000, the tenant would need to cover this expense in addition to the base rent.
Here’s a hypothetical example to illustrate how a triple net lease works:
Imagine a company, ABC Corp, leases office space in a commercial building under a triple net lease agreement. The base rent for the office space is $3,000 per month. Additionally, the annual property taxes for the building are $12,000, the insurance premium is $6,000 per year, and the annual maintenance costs amount to $8,000.
Under the terms of the triple net lease:
– ABC Corp would pay the base rent of $3,000 per month.
– ABC Corp would also be responsible for paying the property taxes, insurance, and maintenance costs. This totals $26,000 annually ($12,000 for property taxes + $6,000 for insurance + $8,000 for maintenance).
– Therefore, ABC Corp’s total annual financial obligation would be $38,000 ($3,000 x 12 months for base rent + $26,000 for additional expenses).
When there are multiple tenants in a commercial property under a triple net lease, the responsibility for paying the triple net expenses is typically divided among all the tenants based on their leased space’s proportionate share or on a per-square-foot basis. Each tenant would be responsible for their share of property taxes, insurance, maintenance costs, and any other applicable expenses outlined in the lease agreement.
Here’s how it works:
1.) Proportionate Share: The landlord calculates each tenant’s proportionate share of the triple net expenses based on the percentage of the total leasable space they occupy compared to the entire property. For example, if Tenant A leases 30% of the total leasable space in the building and Tenant B leases 70%, their respective shares of the expenses would be allocated accordingly.
2.) Per-Square-Foot Basis: Alternatively, the landlord may allocate the triple net expenses based on the square footage of each tenant’s leased space. This method ensures that tenants with larger spaces pay more in expenses compared to those with smaller spaces, regardless of their proportionate share of the total leasable area.
Once the allocation method is determined, each tenant is responsible for paying their share of the triple net expenses in addition to their base rent. This ensures that the financial burden of property taxes, insurance, maintenance, and other expenses is distributed among all tenants in proportion to their use of the property.
It’s essential for tenants to review the terms of the lease agreement carefully to understand their obligations regarding triple net expenses and how these expenses will be allocated among multiple tenants. Additionally, tenants should budget accordingly to cover their share of these expenses in addition to the base rent.
Disclaimer: The information provided in this article is for educational and informational purposes only. It is not intended to be, nor should it be construed as, financial, legal, or investment advice. Readers are advised to consult with qualified professionals, such as financial advisors, attorneys, and/or real estate experts, before making any financial decisions or entering into any commercial real estate transactions. The author and publisher of this post make no representations or warranties regarding the accuracy, completeness, or suitability of the information provided herein. The use of this information is at the reader’s own risk.
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