Triple net leases, or NNN leases, are common commercial real estate contracts for those organizations and companies seeking rental spaces to grow their business and provide steady financial growth with low-risk factors. A triple net lease transfers all of the additional expenses associated with owning and operating the property from the landlord to the tenant. These expenses include the net real estate property taxes, net building insurance and net property maintenance. Because the tenant assumes these additional financial responsibilities, triple net leases generally have the lowest rental rates. How does the landlord determine these rates and expenses? Here is how to calculate a net lease.
Expenses and Payments Associated with Triple Net Leases
Triple net leases require the tenant to pay all three of the additional expenses associated with the property, while single and double net leases only require the tenant to pay a portion of these fees. The landlord may prefer the tenant to make these payments directly each month or to cover the costs of these expenses through adjustments made at the anniversary of the leasing term–whether the lease is terminated or renewed. As property taxes fluctuate annually, the landlord should provide the tenant with a property tax statement and the portion of taxes the tenant is responsible for when renting in a multi-tenant building.
Calculating a Triple Net Lease
Triple net leases are calculated by adding the yearly taxes on the property and the insurance for the space together and dividing that amount by the building total rental square footage. The process of calculating a triple net lease is simplified when an entire building is leased to one tenant.
However, in multi-tenant buildings, it’s important to take account of the maintenance and upkeep of common areas within the space. These common areas include spaces such as lobbies, courtyards, communal bathrooms and hallways. Determine the yearly cost of maintaining and operating these common areas and divide that total by the amount of rental square footage within the building. Then, take this number and add the total amount for property taxes, insurance, maintenance expenses and common area expenses and divide the total by 12. This number is the monthly cost. Add this monthly cost total to the monthly rental rate per square footage and multiply this number by the number of square feet each tenant leases to determine the triple net lease amount for each tenant in your building.
Understanding how rental expenses are charged within different leases is a crucial component of responsibly renting commercial real estate spaces. Interested in commercial real estate investment? Ground + Space is a leading commercial real estate brokerage firm that specializes in single-tenant and retail NNN investments. Contact us today to find out more about our current listings!