What is Triple-Net Rent, And What are Typical NNN Costs?
What is Triple-Net Rent, And What are Typical NNN Costs?
You can find the term “Triple-net rent” in rent. If the tenant bears expenses mentioned above, except the repair of the roof and the shed, it is considered double-net rent.
Repair of the roof and the partition describe repairs to the constructive parts of the building (roof, facade, load-bearing parts, etc.). These can be transferred to the tenant in rent only utilizing an individual agreement, i.e., such a clause would be invalid in a general business condition.
Since there is extensive contractual freedom in rent and the rent regulations from a residential lease do not apply, the contracting parties can agree on further rental arrangements. It is not uncommon, for example, for turnover rents to be agreed upon, in which the rent is made dependent on the tenant’s turnover. It is also common to link rent to a price clause.
Here, distinguish between clauses subject to approval (value retention clause) and clauses not subject to lease (tension clause, cost element clause, performance reservation clause). However, value retention clauses in rent are deemed to be automatically approved under certain conditions. For example, a NNN only describes the scope of the rent and can therefore be linked to a price clause in development. NNN is increasingly preferable. The one who rents it takes all responsibility.
Triple Net (NNN)
It is common to conclude so-called lease agreements in the modern office, retail, and warehouse lease markets (i.e., institutional agreements).
Such agreements state that tenants must, in addition to base rent, also pay maintenance fees. Service charges include specific fees and taxes calculated in connection with the maintenance of the entire building in which the subject of the lease is located. For example, it can be everyday area cleaning, snow removal, garbage removal, elevator, manager’s remuneration, tax expenses, perpetual usufruct fees, and insurance).
It is possible to calculate the total value of charges annually based on the total expenses and expenses related to the maintenance of the entire building to the area of the subject of the lease. It concerns the common area factor and the so-called add-on factor. In addition, tenants pay fees in monthly advance payments (usually together with the rent). You can also count it per square meter.
NNN — so-called institutional agreements.
The total charges are the annual proportion and expenses related to the service of the building concerning the area of the subject (including the add-on factor, i.e., the common area factor). The amount is usually per square meter of the office space, so it increases proportionally with the size of the premises.
Before starting negotiations, you should familiarize yourself with the types of settlements used in rent and be aware of the elements included in the expenses.
It is much more profitable for the owner to use the NNN contract than for the tenant. There are risks, but they are insignificant. The most significant risk is the tenant refusing to renew the contract. Also, because similar properties may locate in the vicinity, there may be price fluctuations.
For NNN, it is beneficial because the final cost of renting the property is significantly reduced. But you have to anticipate scenarios in advance that the cost of utilities is constantly increasing, the building often needs to be repaired.
What are Typical NNN Expenses?
Depending on the accepted contractual model of settlement, tenants can anticipate the appearance of additional fees implied by the size of the area or the location of the office building. Therefore, tenants who decide to conclude an NNN agreement should bear in mind that, apart from basic rent, they will have to cope with fees for:
Utilities like gas, electricity, or water charges are worthwhile before signing the contract to estimate their average consumption. In the case of older buildings, they will undoubtedly be higher. Modern (green buildings) with certificates of sustainable construction guarantee a reduction in fees for utilities. It is worth asking the building manager to estimate electricity, gas, and water expenses.
Telephone and internet fees largely depend on the negotiating skills of the tenant. Suppose you’ve been using the operator’s for some time and you manage to transfer the existing Internet service agreement to the new location. In that case, it will not be an element of negotiations with the manager. If it is not possible or the tenant has not been bound by agreements before, the manager should verify the amount of these fees.
Insurance is a very often overlooked cost. You should remember that most managers require insurance. It is worth checking with several competing insurance companies to compare offers and negotiate the best conditions.
Repairs and cleaning: not all agreements include expenses for cleaning of rented space (not to be confused with common areas).
Optimistic from a tenant’s point of view is that a dynamically growing supply of office space results in more and more affordable office rent prices. Although there is no visible drop in offer prices, the number of financial conveniences served to future tenants is growing. It concerns vacation rental maintenance, finishing of the space according to the tenant’s needs, employee transfer services, or a flexible approach to contract terms. In the end, the effective rent can differ from the asking price by up to 20%.
If you do not understand the intricacies of all the rules and laws, it is best to seek help from qualified specialized lawyers. They will help you consider all the conditions and make the best possible deal without violating the law. The main thing is to write the terms of the contract correctly and exclude the possibility of manipulation.
NNN is a modern approach that avoids unnecessary liability for the facility owner. For the tenant, such terms will be more favorable and convenient, as they allow him to reduce costs. If you’ve used a classic contract before, it might make sense to take advantage of the new features today. Renegotiate the contract by negotiating mutually beneficial terms.
But remember that only an experienced specialized lawyer will be able to competently draw up the terms of the contract. Do not use ready-made templates downloaded from the Internet. After all, in this way you run the risk in the future. The contract is your insurance.
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