A Triple Net (NNN) Lease is a commercial lease agreement in which the tenant agrees to pay a base rental amount and the net amount of the landlord’s real estate taxes, the net amount of the building insurance, and the net amount of the common area maintenance expenses. In practicality, almost all NNN leases look a bit different and allocate responsibilities between landlord and tenant in slightly different manners. Because of the variations, it is crucial that a tenant pay close attention to the NNN lease proposed to them by a potential landlord.
With a NNN lease structure, almost all responsibilities fall on the tenant versus the landlord. The tenant will be responsible for paying rent as well as the landlord’s direct overhead associated with owning the property (taxes, insurance, operating expenses, utilities, etc.).
If you think this sounds very favorable to the landlord then you are right, it is! So why should a tenant agree to this? The tenant’s ability to negotiate around a NNN leases is typically limited by the particular geographic area. In many areas, it is common practice to require a NNN lease if a tenant wants to lease commercial property. In other areas, especially in smaller cities, it may be less common to utilize NNN leases.
Does this mean a tenant has no room to negotiate more favorable terms? Absolutely not! There are many areas where a tenant can negotiate a NNN lease to make it more favorable.
First, the base rental amount becomes a key negotiating term. If the tenant is taking on all responsibility and risk of the landlord’s overhead, then the tenant may be able to negotiate a more favorable base rental amount.
Second, NNN leases can vary in the particular items included as part of the overhead. Frequently, tenants can negotiate that the landlord remain on the hook for certain repair costs and/or utilities
Landlords prefer NNN leases because they remove some of the unknown financial risk related to commercial property. If taxes or insurance increase, or if unexpected maintenance costs are incurred, then the tenant is on the hook to bear the burden of the additional expense. This is good for landlords and especially nice for investors.
If overhead (taxes, insurance, maintenance, etc.) is prorated amongst multiple tenants, then it is important to take a close look at the calculation. Is the proration based upon leasable space or occupied space? The latter could be devastating to a tenant. For example, if five tenants in a five-unit commercial building split the overhead equally, everything is fine until 3 tenants vacate the property, leaving only 2 units occupied. If taxes, insurance, maintenance and utilities are prorated based upon occupied space then the 2 remaining tenants must now split everything 50/50. Not good!
If overhead is prorated based upon leasable space, then it is important for a tenant to pay close attention to the definition of “leasable space” – does it include space that is available but not yet built out? For a tenant, you want to make sure it includes the entire building no matter the condition or intent of the landlord to utilize other portions of the building.
McCormick Law & Consulting was integral in the creation of our non-profit. We promised our 12 y/o son that we would keep fighting cancer for kids like him but we couldn’t have kept that promise without John McCormick and his team. We were hooked at our first meeting when John simply asked “ Tell me about you son.” McCormick Law and Consulting took care of all the legal work while allowing us to focus on our mission. John and his team continue to be a great resource and supporter of D-Feet Cancer The Dalton Fox Foundation. We couldn’t have asked for better legal representation. Thank you McCormick Law & Consulting.
I definitely could have created my new business, Davis Wealth Management LLC, but boy that would have been a mistake. Because business formation is not an area in which I practice, I had no idea where my blind spots were, and let me tell you there were plenty. The knowledge I received from the firm is invaluable.
John McCormick and his firm are very reasonably priced and quickly and efficiently assisted me in creating my new business. It was completely turn key; they did everything for me. I can't recommend their services enough. Also, huge shoutout to Taylor who kept me informed every step of the way!
John and his team were great to work with. They provided advice for starting my business and set everything up in an efficient and timely manner. I will definitely recommend them to others!
I contacted McCormick Law firm to register my moving service in NC. They did an outstanding job. Completed the process way sooner than I expected. Thank you, Taylor.
McCormick Law, PC d/b/a McCormick Law & Consulting and Driving Defense Law is a boutique law firm located in Norfolk, Virginia & Raleigh, North Carolina, that seamlessly serves clients throughout Virginia and North Carolina. Whether you are a new or existing client of the firm, McCormick Law, PC, cannot represent you on any new matter until the firm has made a determination that there is no conflict of interest and that it is willing to accept the new engagement. The testimonials on this website reflect the real-life experiences and opinions of our clients. However, the experiences are personal to those particular clients, and may not necessarily be representative of all clients. We do not claim, and you should not assume, that all clients will have the same experience. Your outcome may vary.
© McCormick Law, PC, all rights reserved