You’ve decided you want to lease a space for your business, and your realtor presents you with a lease amount that says NNN. What does NNN mean? How is it different from another option called a gross lease? Is one better than the other? Let’s look at the difference, because it’s is always good know what you are talking about before you actually compare.
An NNN lease is the most common type of commercial lease and is commonly called a triple net lease. On an NNN lease, tenants pay additional expenses in addition to the lease fee, to the landlord or lessor. The NNN fees includes property taxes, property insurance and common area maintenance for a building (CAM). How is this figured? The landlord uses the amount of annual costs and divides it by the total number of rental square footage in the building. The landlord includes the totals for property taxes, insurance, maintenance and common area upkeep and then divides the sum by 12 to arrive at a monthly cost.
For example, if a Cedar Rapids commercial real estate lease is quoted as $14 NNN. This means that in addition to the $14 square foot yearly rate you are also responsible for paying the taxes, insurance, and common area maintenance fees. In this example assume the taxes are $7 square foot per year, the property insurance is $0.40 per year and the CAM is $3.00 square foot per year. Based on those numbers your total yearly rent would be $24.40 per square foot per year. If you are leasing 4,000 square foot your yearly rent would be $97,600 or $8,133.33 monthly rent.
So, what is gross lease? Gross rate or full-service rate includes everything; taxes, insurance, maintenance, in the total lease rate. This means you will pay one lump sum for rent, from which the landlord pays his expenses. On the gross lease, the landlord pays all or most expenses associated with the property. This includes taxes, insurance, and common area maintenance out of the rents received from tenants and could also include the utilities and janitorial services. You are responsible for paying your own property insurance and taxes on a gross lease.
So which type of lease agreement is most beneficial to you, the tenant? Well this is up to the individual, and there are pluses to both.
An NNN lease allows you to make changes on your own usage which will save you money on the amount you’re charged, for example on your utilities. Usually the monthly rent on an NNN lease is lower than a gross lease, but with an NNN lease you has a higher level of responsibility for the building itself.
Gross rate lease can beneficial to as well because it’s much easier to budget your expenses for the year without worrying about unexpected building expenses. For example, this winter, the cost of snow removal is going to be much higher than in previous years and would not be passed on to you. The landlord assumes all responsibility for the building and costs associated with it, allowing you to concentrate on growing your business.
The most important rule of commercial leases is for tenants to read their leases carefully and clarify with the landlord exactly what expenses they are responsible for. At the end of the day, it’s a matter of what you’re comfortable with – making a set monthly payment or paying only for what you use.
Want to learn more? Read our blog on CAM charges and the commercial real estate lease.