When searching for your office, retail or industrial space, you’ll encounter many different commercial real estate terms that you may not be familiar with.
At AQUILA, we’ve helped hundreds of clients navigate and understand these real estate terms.
In this article, we’ll explain what a triple net (NNN) lease is, what it includes, and give you a quick look at other types of lease structures.
What Is a Triple Net (NNN) Lease?
A triple net lease, also known as an NNN Lease, is a lease in which the tenant agrees to pay their pro-rata share of all expenses associated with property maintenance, taxes, and insurance, in addition to a predetermined base rental rate.
These expenses are commonly referred to as operating expenses.
Operating expenses (op/ex) are the costs associated with operating and maintaining a commercial property such as an office building or retail center. In a triple net lease, op/ex consists of three main elements: property taxes, insurance and common area maintenance (CAM) fees.
In a triple net lease, your annual rental obligation, called gross rent, will be your base rental rate plus operating expenses.
What Does a Triple Net Rental Rate Include?
In a triple net lease, your agreed upon rental rate, or base rent, is essentially money in the landlord’s pocket. This money will be used to cover any debt on the property and is where a profit can be made.
Additionally, you’re agreeing to pay operating expenses on top of this base rent. While these operating expenses will be paid based on an estimated rate, the tenant is only responsible for paying the actual cost to operate the property over the course of the year. There is no profit to be derived from the operating expenses.
This is different from a full-service lease structure, in which the tenant agrees to pay a predetermined rate that includes operating expenses.
From a tenant’s perspective, the advantage of a triple net lease is that if the landlord overestimates the op/ex, you’re not obligated to pay that rate. Additionally, if the property’s operating expenses drop for any reason, you will see that directly reflected in your gross rent.
On the other hand, because operating expenses can vary year to year, it can be harder to budget for your annual rental expenses.
Other Lease Elements
In addition to your rental rate and operating expenses, there are other elements of a NNN lease that can affect your overall financial obligation.
Tenant Improvement Allowance
A tenant improvement (TI) allowance is a type of incentive offered by landlords to encourage tenants to sign a lease. Usually, the landlord offers the tenant a dollar amount per square foot to build out their office, retail or industrial space. Tenant improvement allowances can typically be used to cover any hard or soft costs associated with your space such as paint, flooring, electrical, etc.
Free Rent is another type of incentive that landlords often offer on long-term leases. Exactly like it sounds, free rent is when a landlord offers a few months of rent at no cost at the beginning of the tenant’s lease.
Note, in a triple net lease, free rent typically only applies to base rent, and the tenant is still responsible for operating expenses during this time.
Other Types of Lease Structures
In Austin, most office leases are structured on a triple net basis.
However, there are a number of other lease types that you may see in other markets. These include:
- Full Service/Gross: the tenant pays one flat annual fee, which includes an estimate from the landlord as to what op/ex will be over the term of the lease
- Single Net: the tenant pays their pro-rata share of property taxes plus base rent
- Double Net: the tenant pays their pro-rata share of property taxes and insurance plus base rent
- Percentage: the tenant agrees to pay a base rent and operating expenses, plus an additional variable monthly cost related to the tenant’s monthly revenue
To learn more about Triple Net Leases or other types of lease structures, check out these articles:
- Typical Types of Commercial Leases in Austin, Texas
- Your Guide to the Elements of a Commercial Lease
- How Much Does It Cost to Lease Office Space in Austin, Texas? (Rental Rates, Pricing)
If you want to learn more about leasing your office space, read our Ultimate Guide to Finding Office Space.