Unlike residential leases under which tenants might be required to pay utilities in addition to the rent they pay to their landlords, owners of commercial real estate try to pass along as many of their costs and expenses associated with the property to the tenant as possible. If you are considering the rental of commercial or retail property, there are four things you need to know about leases in case your future landlord presents you with a NNN lease.
Leases are negotiable, but market conditions may limit your bargaining power
There might be a few exceptions depending upon the laws in your state, but most of the terms that go into a lease are freely negotiable. The only problem is that the demand for prime locations can make it difficult for a tenant to negotiate favorable terms for commercial real estate when building owners have several tenants all vying for the same property.
Know the difference between gross leases and net leases
If your only experience with leases and rental property has been as a tenant in an apartment, then you will probably be in for a shock when discussing lease terms with a commercial property owner or real estate broker. Your apartment lease was most likely a “gross lease.” This means the rent you paid each month was used by the landlord to pay the expenses associated with ownership of the building, including real estate taxes, building maintenance, insurance and security.
Commercial leases are usually “net leases.” The rent received by the owner of the property in a net lease does not go toward payment of the expenses associated with ownership of the property. Instead, the lease makes all or some of those expenses the responsibility of the tenant in addition to the monthly rent.
Know the difference between the three types of net leases
The expenses that landlords usually try to pass along to tenants of commercial properties are the real property taxes, premiums for fire, casualty and liability insurance, and maintenance expenses. The following are the three types of net leases that you might run into if you are leasing commercial real estate:
. Single net lease
. Double or NN lease
. Triple or NNN lease
Single net leases pass along the taxes on the property to the tenant. If the property is occupied by more than one tenant, then the taxes are apportioned. Repairs and insurance premiums are paid by the landlord out of the monthly rent.
Double net lease or NN leases require payment of the taxes and the premiums on the building insurance by the tenants. A triple net or NNN lease makes the tenant responsible for taxes, insurance and maintenance costs associated with the building in addition to payment of the monthly rent.
Understand the terms before you negotiate
Your ability to negotiate the terms of a commercial lease might be limited when occupancy rates are low, so you might wind up with a NNN lease. It’s important that you know what you will be paying so you can take that into account when figuring out your monthly budget.