Triple Net (aka NNN)
A triple net lease structure is one in which most of the Premises or Building expenses are passed through to the Tenant. Typically, these passed through expenses include operating expenses, real estate taxes, all utilities, and property insurance. The triple net lease is more commonly used in retail, ground or stand-alone industrial leasing, but there are different intensities in triple net lease structures. For example, most triple net leases do leave some responsibilities to the Landlord, be it structural or critical building systems such as HVAC, in-place plumbing, etc. A broker should be able to advise what is normal in which lease situation taking into account a multitude of factors including location; but, as space gets farther out from high-density areas and institutional ownerships, the market will get more erratic. There have been attempts in recent years by office landlords (mostly in cases of newer construction) to switch to this lease structure even for their office tenants, but not all attempts have been successful, as the market has been in the hands of tenants for a few years running.
A full service lease structure is one in which the Landlord agrees to pay the operating expenses and real estate taxes for the base year, established in any number of ways but usually the first year of occupancy, and the Tenant is responsible for any increases in those costs in future years. The current year expenses minus the base year expenses equals the Tenant’s cost responsibility for the current year.
Current Year Costs – Base Year Costs = Tenant’s Current Obligation (Ex. $110,000 – $100,000 = $10,000)
Tenants can sometimes get the Landlord to cap increases for controllable expenses. Tenant needs to be careful with Building’s occupancy during the base year. If the Building is 50% occupied during the base year, and 90% occupied in future years, the Tenant could end up paying the dramatic increase in both real estate taxes and operating expenses. There is occupancy gross-up language that is designed to protect Tenants from this artificial inflation. Landlords’ attorneys in the last few years have tried to turn this language to their advantage and apply the occupancy gross up language to future years, so the Landlord could in effect take in more funds than they expend in any given year. Brokers and attorneys working for the Tenant should fight this and win, somewhat dependent on tenant size and credit-worthiness.