Looking through lease documents is confusing even at the best of times. Once specialized terminology gets thrown into the mix, it can become downright impossible!
Although an agent will help you sift through all the terms and conditions, you should also try to have a solid understanding so you know what you are getting into.
If you have seen a commercial lease document, then you may have noticed NNN listed along with the rental amount. This refers to certain extra payments you are responsible for as the leaseholder.
If you don’t understand what NNN means, you’ll get a shock when the first month’s rent bill comes around. Let’s get right into it and help you understand exactly what NNN means in a commercial lease.
3 Charges Associated with NNN
The NNN, net net net, that you see on your lease agreement stands for ‘triple net rent’. This means that on top of the stated per-square-foot fee for renting the space, you will also be responsible for things like:
- Property Taxes
- Property Insurance
- Common Area Maintenance Fees
For example, you may have a base rental fee of $26 NNN per sqft/year. In this case, your rent is $26, plus the NNN payments. These extras are also quoted per square foot and specified elsewhere in the contract.
Now that you have a clearer idea of what is included in NNN charges, let’s take a closer look at each one.
One big way that a commercial lease differs from a residential contract is how property taxes are handled. As the leaseholder, you will be paying for the property taxes via NNN charges listed next to the base rental fee.
Like the base rent, your share of property taxes is calculated on a square foot basis. You will only be paying tax based on the actual space you are renting. While NNN expenses are sometimes quoted in full rather than broken down by portion, it is worth digging deep into the contract to find out the details for yourself.
The amount of your total NNN price that is made up of taxes is going to differ based on many factors. Municipal governments often apply complex rules and calculations to determine how much property tax a commercial building owner has to pay.
An example would be a tax payment of $5 per square foot, where the base rent is $26 sqft/year for a 1000 square foot space. A simple calculation will show you that over the course of the year, you will be paying an extra $5000 per year or $400 per month for property taxes on top of the base rent.
In general, you should not expect the taxes to be more than 3-4% of the total appraised value of the building per year. If you find that the tax on your chosen building seems a bit high, it is worth looking elsewhere and comparing.
Some buildings can get special exemptions to encourage commerce and some districts have lower tax rates.
The next item you see included in the NNN charges is property insurance. As the name suggests, this covers damage to the property itself. This is one charge that you should look carefully into so you understand what is or is not covered.
Just because you are paying for property insurance does not mean that your insurance needs are fully covered. In some facilities, this charge covers public liability insurance while in others, you need to sort out this fee on your own. Also, property insurance rarely covers your customized shop front or fit out.
Luckily, this tends to be one of the cheapest components of the NNN charges, with normal rates being less than a dollar per square foot rented. If we continue with our example from above, our $26 sqft/year property also requires a property insurance payment of $0.60 per sqft/year. On a 1000 square foot property, that comes out to a total of $600 per year or $50 a month.
If you are renting a large space or an entire facility, the type and cost of insurance is definitely something that can be negotiated. However, if you are only renting a small unit in a larger facility, you are unlikely to have enough bargaining power.
Common Area Maintenance Fees
The final item you will find listed under NNN charges is Common Area Maintenance Fees or CAM fees. Money collected from these fees goes toward the general upkeep and maintenance of the property and common areas.
This can include parking lots, external walls and facades, garden maintenance, HVAC repairs and upgrades and more. Before you sign on the dotted line, you need to understand exactly what will and will not be covered under these fees.
Also, look to see if there is a provision in the contract for the landlord to raise the CAM fee in the future. A lot of business can be caught off guard by rising CAM fees that make their existing lease unaffordable.
Using our example of a 1000 square foot lease for $26 sqft/year, an average CAM runs around $4 per square foot. This comes out to $4000 a year, or $333 a month in addition to your base rent.
Now that you know the ins and outs of NNN charges, it’s time to get out there and look for your new commercial lease. Instead of doing everything yourself though, let’s take a look at how you can find some professional help.
Get Expert Guidance Negotiating Commercial Lease Terms and Conditions
Although our main aim is to help you understand NNN charges, there is a much bigger lesson. Always read commercial lease documents carefully.
Commercial rental contracts are a serious, long term commitment. You need to look at and understand all the terms and conditions if you want your business to be successful now and into the future.
Because so much is at stake when agreeing to a commercial lease, many business owners choose to use a professional real estate agent like Commercial Lease Locators. Our experienced and friendly agents have negotiated countless leases and can help you understand even the most complex terms.
To get in touch with our team you can drop by in person, send us a message on our website, or call or text at 512-920-6270 during business hours.