This post originally appeared on Mike Lin’s blog and is republished with permission. Find out how to syndicate your content with theBrokerList.
If you are deciding to invest in a new property or are currently researching the ownership of an additional property, you might come up against a few unfamiliar terms. Some of those terms include the lease itself: the difference between a NNN lease or a Gross Lease, as commercial leases are not “one size fits all.” Which expenses will be reimbursed by the tenants? What is the landlord’s responsibility?
It’s important to know the difference between these types of leases. Is one better than the other? As an investor, you will want to make sure you know all the details about the property, and that includes understanding the responsibilities of each tenant. . Commercial real estate investors want to feel as though they are negotiating a structured deal that fits all their criteria.
Knowing the difference between an NNN and Gross Lease gives you the knowledge to understand what you are comfortable with as an investor.
What Is A NNN Lease?
A triple net, or NNN lease, is a fairly common type of commercial lease, especially for retail properties. “Net” stands for any expenses that are passed directly to the tenant. Under a NNN, a tenant will reimburse the landlord for expenses in addition to the base rent. , These fees include the three “nets”: property taxes, insurance, and common area maintenance (CAM). They may also include other fees such as property management.
A triple net lease means that the tenants bear the cost of increasing fees. For example, as property taxes rise year over year (up to 2% per year in California), those tax increases are passed onto the tenants.
The cost of the NNN fees is typically calculated by adding up the annual reimbursable costs and dividing them by the proportionate square footage (SF) of the rented space. So, you will include the insurance, tax, maintenance, and upkeep and then divide the entire sum total by twelve for the NNN monthly cost.
Let’s use an example since California charges rent by a square-foot-per-month cost. If in Corona, a commercial real estate lease has a common lease rate of $2.50 + NNN, then in addition to the base rent, the holder of the lease will be responsible for paying any insurance, taxes, and common maintenance fees of the area.. $2.50/sf/mo is the base rent, and the NNN fees (which include taxes, insurance, and maintenance) could be an additional $0.75 sf/mo, per this example. These monthly NNN fees are tracked by the landlord and reconciled at the end of the year.
Each year, a landlord should send a NNN reconciliation document to each tenant, outlining the actual NNN expenses that the property incurred. If the landlord has collected more NNN fees than the actual expenses, then he should reimburse the tenants for the difference. If the landlord has not collected enough NNN fees throughout the year to cover his expenses, then he should bill the tenants for the difference.
What Is a Gross Lease?
A gross lease includes taxes, insurance, maintenance, all in the monthly rent that a tenant pays. A gross lease is what the average home renter is used to: a lump sum rent decided on by the landlord. Under a gross lease, the landlord will pay all (or most) of the expenses that are associated with the property. This can include insurance, taxes, and any necessary area maintenance.
Under a gross lease, you will typically still need to be responsible for paying for your own insurance to cover the personal property inside of your space. You may or may not also be responsible for your own utilities, as well. In a typical retail lease, tenants are responsible for their own utilities, but in an office lease, the rent may include the cost of utilities. The leases will spell this information out.
A Full-Service Gross (FSG) lease means that all of the expenses (even utilities) are covered by the landlord. In a Modified Gross (MG) lease, some of the expenses are covered by the tenant, and some by the landlord.
The Benefits Of Each Lease Type
As an investor, which one is better for you in the long term, a NNN or a Gross Lease? There are benefits to both, and it’s important to understand them so you can find the one that is for you. Commercial real estate brokers such as Mike Lin specialize in finding the right properties for the right investors.
Triple net leases let you pass on many property expenses to the tenants, which should result in a more stable level of income from year to year. For example, if a law is passed that allows property taxes to increase dramatically if your tenant is on a triple net lease, then that tax increase would not affect your income, since the tenant would be paying for it.
Gross leases often provide a landlord with the opportunity to convert the leases to NNN leases when the current term is over and can provide future upside for a property owner. Owners of retail properties usually prefer their tenants to be on NNN leases.
Read The Lease
Both types of leases have benefits based on the scenario and depending on the landlord, tenant, type of property, and investment strategy. Work with your attorney or CPA to figure out what works best for your team and your business before you make your investment.
Whether you’re leasing a space for a new restaurant, local dentist’s office, or an up-and-coming business, knowing the difference between NNN and Gross Lease will benefit you in the long run. It’s important to read your leases and know what you are getting into.
Alison Brown is the Marketing Strategist at Children’s Dental Fun Zone. She has been inclined towards oral care since her childhood as she comes from a family of dental background. She loves spending time with kids and contributes her insights by writing and promoting informative blogs for families to help them adapt to their new homes and localities without any hurdles.