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The basics you must know about a Triple Net Lease

Triple Net Lease, also known as NNN lease, is a commercial real estate lease in which the Tenant is responsible for paying for all or some of the property’s Operating Expenses or sometimes called, Common Area Maintenance. These expenses can include property taxes, insurance, maintenance for common areas costs. In a Triple Net lease, the Tenant not only pays rent but also assumes financial responsibility for the upkeep and maintenance of the property. This type of lease is common in commercial real estate, particularly in retail and warehouse spaces and less likely to come across in office space. 

Benefits of Triple Net Leases For Landlords

Landlords can easily project their income stream, as the Tenant is responsible for the expenses associated with the property. There can be years when Real Estate Taxes and Insurance increase, those increased amounts can be passed directly to the Tenants.  Landlords can use this predictable income stream to secure financing for additional real estate investments or to reinvest in the property itself. Tenants being responsible for maintaining the property, Landlords can minimize their involvement in the day-to-day management of the property.

Disadvantages of Triple Net Leases For Landlords

If the Tenant fails to pay for expenses such as property taxes or insurance, the Landlord may have to cover those costs, leading to financial losses. Furthermore, if the Tenant is responsible for maintenance, the Landlord may not be aware of issues that arise, leading to potential property damage that could reduce the property’s value.

Benefits of Triple Net Leases For Tenants

Triple Net leases can provide more control over the property and potentially lower costs since they are responsible for maintenance and repairs by choosing which vendors to use or update themselves. Additionally, since Tenants have more control over the property’s upkeep, they can customize the space to fit their specific needs. This can be particularly advantageous for businesses with unique requirements, such as medical offices or laboratories.

Disadvantages of Triple Net Leases For Tenants

Tenants should also be aware of the potential downsides of Triple Net leases. If the property requires significant maintenance or repairs, the Tenant may be responsible for substantial expenses. Property Taxes and Insurance can fluctuate and subsequently may face higher costs if Property values or Insurance rates increase.

Triple Net leases can benefit Landlords and Tenants. Landlords can secure a stable income stream and minimize their involvement in property management, while Tenants can have more control over the property and potentially lower costs. It is essential for both parties to understand the potential downsides of triple net leases, such as financial risks and increased expenses. As with any real estate transaction, it is crucial to carefully review and negotiate the lease terms to ensure a mutually beneficial arrangement.

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All You need to Know About Operating Expenses In Office Space Lease

 

What Are Operating Expenses In Office Space Lease?

Operating Expenses are the expenses to operate the building. The Landlord has an annual budget and typically reconciles by June of the following year. A good Landlord stays within or close to their budget each year. Depending on the type of lease structure (Full Service, Modified Gross, or Triple Net) determines if a Tenant is just responsible for the pass thru only or the entire Operating Expense. Read more about the three most common lease structures here.

Why does this matter?

When you sign a new lease your base year is established. You always want the highest base year. Why? Each Tenant is responsible for any pass thru overage from the Landlord based on the prorated percentage of their sf of their suite being leased in the building. Having the highest base year minimizes the amount of this potential pass thru.

How can we evaluate the consistency of the Landlord operating within or close to the Operating Expense budget?

  • During Lease Proposal negotiations, requesting the two previous year’s Operating Expenses budgets and reconciliation will be a good indicator of the Landlord’s budgeting consistency.
  • Once the Landlord’s consistency is verified, a strategy to minimize any potential pass thru is to cap the controllable operating expenses i.e. management fee, cleaning, improvements on the building, etc. We discussed the importance of reviewing the Operating Expense reconciliation here. We once saved a Tenant tens of thousands of dollars who had been overcharged for a few years by a Landlord “passing thru” expenses that were not application to the Tenant’s lease. Reconciliation is one of the more overlooked areas of fiscal stewardship when leasing office space.

The above is just scratching the surface of what is entailed in Operating Expenses.
Having a Tenant Representative on your side will give you an advantage when evaluating operating expenses in different buildings. Give our team at Office Space Brokers a call 813-289-3700, for a complimentary consultation to strategize your company’s office space.

Types of Leases

There are typically three primary types of real estate leases, each with its own set of benefits and drawbacks. You must read the lease specifics thoroughly so that you know what to expect in any circumstance. Full Service, Modified Gross, and Triple Net leases are the three most frequent forms of leasing.

Full Service: 

A lease form in which the landlord is liable for all of the property’s operational expenditures.

Modified Gross: 

In which the tenant pays a flat rate for the space.

Triple Net:

Where The Tenant pays all the expenses of the property to the landlord.

 

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The Most Common Types of Commercial Real Estate Leases: Full Service, Modified Gross and Triple Net

In commercial real estate, there are typically three different types of leases structures. Knowing the characteristics ensure you know what to financially expect and budget for with your monthly office rent. In Tampa Bay, a particular type of lease structure parallels with a different type of space and location.

Two main items to consider, location and type of buildings.

For example, if you are leasing office space in the Tampa in a large building in Westshore or Downtown Tampa, nine times out of ten you have a Full Service office lease. Compared to if you are leasing office space in Carrollwood you would come across more Modified Gross or Full Services leases.

The type of building can also play a role but there are exceptions. If you relocate your office to a different type of building (from a multi-story office building to a single-story building) the kind of lease structure can vary.

What is the Difference between Full Service (FS), Modified Gross (MG) and Triple Net (NNN) Leases?

In commercial leases there are three typical types of leases that can be negotiated between a tenant and a landlord: “Full Service Gross” (FSG), “Modified Gross” (MG) and “Triple Net” (NNN). In some cities, one type of lease may be more prevalent than the others. In general, full service usually applies to a multiple story office building, MG single story office space or warehouse and NNN applies to retail space. Usually, the differences between the three lease types relates to how (and by whom) the “triple net” costs (taxes, insurance and common area maintenance (CAM)) are dealt with.

Full Service:

In an FS lease, the triple net costs and any additional costs such as utilities and janitorial, but excluding the costs of phone/data, are bundled into the base rent. FSG leases provide the tenant with the highest level of certainty regarding their complete occupancy cost; however, the downside is that the annual escalator will increase the base rate of the lease regardless of any real fluctuations in the operating expenses.

Modified Gross:

An MG lease typically includes all the triple net costs but excludes utilities and/or janitorial service. An MG lease has similar advantages/disadvantages to a FSG lease; i.e. taxes, insurance and CAM are typically bundled into the base lease rate. A unique disadvantage is that the tenant will have two additional variable costs to consider: utilities and janitorial. It is important to note that a modified gross lease can be “modified” to include or exclude any individual expense within the base rate “bundle.”

Triple Net:

In an NNN lease, the tenant is responsible for their pro-rated share of the “triple net costs”: taxes, insurance and CAM; in addition, the tenant is also responsible for utilities and janitorial. The primary advantage to an NNN lease is transparency; all of the building’s operating costs are available for the tenant’s review. The primary disadvantage is that the triple net costs are not guaranteed in the Lease and are subject to increase or decrease, increasing is much more typical.

 

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What Is A “Full Service” Office Space Lease?

When locating office space have you noticed several properties have different items included in the monthly rent? This is due to the different types of lease structures. Typically, there are three different industry wide: Full Service, Modified Gross and Triple Net. A Full Service lease is used most common among the buildings in the higher end of the market such as class A and multi-story buildings. Typically office space in the business and downtown area districts like Westshore, Downtown Tampa and South Tampa offer a full service lease. However, these leases are also used in the different sub-markets throughout Tampa.

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