The decision by an investor to purchase a commercial real estate property requires a clear understanding of revenues and expenses. Leases must properly detail which expenses are paid by the tenants and which expenses are the responsibility of the landlord. Lease types include gross, modified, modified gross, percentage, net, modified net, double net, and triple net (NNN).
What is a Triple Net (NNN) Lease?
A triple net lease provides that a tenant agrees to pay a monthly lump sum base rent, and also his proportionate (pro-rata) share of real property taxes, property and liability insurance, and maintenance (repairs, common operating expenses and common area utilities). Each tenant is further responsible for all costs associated with their own occupancy, including personal property taxes, personal property and liability insurance, utility costs and janitorial services.
The responsibility for maintenance and capital expenses must be well-defined and fully understood by both the tenants and the landlord. Typically, capital expenses are borne by the property owner, including the exterior and structural elements of the building. It is customary that the plumbing, electrical, and HVAC maintenance is the responsibility of the tenants.
Each tenant’s prorated share of property taxes, insurance and operating expenses are generally estimated on an annual basis, and paid monthly. It is customary in a commercial real estate sales transaction that the purchase contract sets forth the details by which the investor and his agent verifies the provisions of each NNN Lease by his own due diligence work while in escrow.