If you are entering the world of commercial real estate for the first time, you may be confused about the terminology. No matter what your circumstances, it is important to understand the terms and implications of your lease agreement.
There are three types of commercial leases that are commonly negotiated for retail rental spaces:
Gross Lease: In a gross lease, the tenant pays a monthly payment which is all-inclusive. This means that the landlord pays all of the building’s operating costs, including property taxes, property insurance, utilities and maintenance.
Percentage Lease: In retail rental spaces which are located in a strip mall, or other types of multi-tenant retail spaces, a percentage lease is sometimes used. In this type of lease, the tenant pays rent and also operating expenses, a maintenance fee for common areas and possibly a percentage of the gross revenues generated by the business. A shopping center often draws customers who then visit other businesses in the same place, such as a coffee shop, a restaurant, or a gift shop.
The Triple Net Lease
A Triple Net Lease lease is often used in commercial real estate, especially in freestanding commercial buildings and retail spaces. In a triple net lease (sometimes called a “nnn” or net, net, net lease,) the tenant pays a base rent, plus property taxes, property insurance, and common area maintenance charges. These charges are usually estimated and charged to the tenants based on their proportionate share of the space. For example, in a 10,000 square foot building, a tenant who leases 1,000 square feet would pay 10% of the building’s taxes, insurance, and common area maintenance charges. Tenants also pay for their own utilities and, of course, their own taxes and insurance.
The landlord might estimate the expenses and charge the tenant on a monthly basis, or bill the tenant as they are incurred. Because these charges fluctuate, the tenant’s costs may fluctuate as the expenses increase or decrease. This may make it difficult for newer businesses to anticipate costs, placing them in financial difficulties. Or it may mean that the tenant benefits from unexpected savings in operating expenses.
Who Gets the Benefit?
A building that is in good condition and has lower maintenance costs benefits the tenant. An older building, or one in which the maintenance and upkeep are expensive, will be more costly for the tenant. Some leases include provisions which allow the tenant to audit the building expenses, or perhaps appeal the property taxes.
A triple-net lease may also have advantages for the landlord. If a tenant’s business has, for example, high electrical costs, or if the tenant is wasteful with the utilities, then the tenant pays the price. It also encourages the tenant to be careful and maintain the space in a responsible manner. The landlord is then spared the responsibility and cost of repairs that arise due to the negligence of a tenant. Another advantage for the landlord is that triple-net leases are generally long-term, possibly 10 years or more. This saves the trouble of looking for a new tenant, negotiating a new lease, and possibly expenses incurred in preparing the space for the new tenant.
Another lease option, which is not commonly used, is the absolute triple net lease. In this type of lease, which is an extreme variation of the triple-net lease, tenants are responsible for all kinds of additional costs, such as construction expenses after a catastrophe, or paying rent after the building has been condemned.
Is It Right For Me and My Needs?
Entering into any lease is a big decision. Always read the lease carefully and make sure you understand your responsibilities and your rights. Before signing a lease, you should consult an attorney experienced in landlord-tenant matters. For more information, please contact Sutherland Law.