Commercial leases are often triple net, meaning the tenant is responsible for building insurance, real estate taxes and maintenance, although the lease agreement usually caps the amount of maintenance costs. This is the so-called three “nets,” also known as NNN. Of course, all triple net lease payments are in addition to rent and utilities. The triple net lease is calculated based on the amount of square footage the particular tenant is renting. For commercial landlords, triple net leases usually make more sense than the alternative, which is the gross rent model. In that scenario, the landlord pays all operating expenses out of the gross monthly rent. That leaves the landlord vulnerable if operating expenses exceed projections.
Triple Net Lease Payments
The tenant may pay the amount necessary for annual property taxes, insurance and the like either directly or via adjustments made on the anniversary of the lease agreement. Property taxes, which fluctuate yearly, are usually paid directly by the landlord to the municipality for income tax purposes. The landlord should provide the tenants with a property tax statement for the upcoming year from the municipality and the amount of the adjustment for which they are responsible. A tenant renting an entire building may arrange to pay insurance charges directly to the insurer, but a copy of the policy must go to the landlord.
As for maintenance, a tenant renting an entire building may take responsibility for all but major repairs, such as a new roof. The downside is that the tenant may decide to perform less than adequate maintenance on the property, so the landlord should inspect the condition of the building on a regular basis and ensure certain standards are spelled out in the lease agreement. When there are multiple tenants, the landlord generally directs maintenance and repairs, as having several parties oversee such work is a cumbersome process.
Calculating a Triple Net Lease
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. Probably the best way to make this determination is by looking at projected gas prices in the near term. Once you arrive at an approximate figure, divide the amount by the building’s amount of rental square footage.
If you’re renting an entire building to one tenant, the process is fairly simple. If you have multiple tenants in the property, you must take into account the upkeep of common areas, such as bathrooms, hallways and the building lobby. Figure out the annual costs for cleaning, utilities and necessary supplies. Take the amount of annual costs and divide it by the total number of rental square footage in the building. Add the totals for property taxes, insurance, maintenance and common area upkeep and then divide the sum by 12 to arrive at a monthly cost. To determine the triple net lease amount for each renter, add those monthly expenses and the monthly rental per square foot charges and multiply it by the number of square feet a renter is leasing. That is the monthly triple net lease amount.
Items you will need
- Real estate tax bill
- Insurance bill
- Previous year’s building maintenance expenses, such as snow removal
- Previous year’s utility bill and maintenance expenses for common area
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