Leasing an office can often seem like it requires learning a whole new language. If you’re thinking about finding new space for your organization, here is a helpful overview of the process and key terms to know going in.
As a disclaimer, I’m neither a real estate agent nor a lawyer so please do not consider any of the below official legal, tax, insurance, real estate or any other sort of advice. With that, let's dive in...
Part 1: What is a triple net lease and what will it really cost me?
What is a NNN Lease?
Most commercial leases are what is referred to as a “triple net lease,” typically written “NNN”. There are 4 components to the triple net lease; the base rate and each of the “nets”.
Base rent is the number you typically hear quoted when people say things like “the lease rate is twenty dollars, triple net”, and it is an annual rate.
Here’s a quick break down to demonstrate. Expect to see "sf" written a lot, which is shorthand for square foot.
- If the base rent of your desired space is $20/sf NNN;
- And the space is 2,000 sf
- Then your annual base rent would be $20/SF x 2,000 sf = $40,000/Year
- Your monthly base rent would therefore be $3,333.33, or $40,000/12.
Pretty simple, right?
Now let’s talk about the three nets: real estate taxes, building insurance and operating expenses.
In a NNN lease, the tenant is agreeing to pay these costs in addition to any other fees or costs that the tenant may bear under the lease (e.g. utilities, data, parking, etc.).
Real Estate Taxes:
This is an inherently local question and depends on the practices of your state and municipality. That said, a general rule of thumb is that the more valuable the property, the more taxes are due. If you are looking at office space in an established neighborhood with little room for additional development and high property values, you can generally expect your property taxes to be higher than in an office park in the exurbs (i.e. commuter towns). And if you're living in a high-growth city, you should also be wary. Your taxes may change dramatically as certain areas appreciate. What seems affordable at the beginning of your lease may not be so in ten years.
This follows the same general trend as property taxes - i.e. the more valuable the property, the more costly the insurance. But there are some other nuances to insurance and you should really just get a quote. The good news is that most agents can give you a rough estimate pretty quickly, and help you figure out if you need supplemental coverage per the terms of your lease if, for instance, you were working with hazardous materials onsite or were located in a floodplain. The bottom line: get an insurance agent that you trust.
Operating Expenses (OPEX) and Common Area Maintenance (CAM):
It’s hard to speak about CAM and OPEX in generalities. They are peculiar to the property type, use, lease terms, local custom, you name it. Common Area Maintenance is typically proportional to the number of tenants and their use of common areas like lobbies and parking lots. If you rented ½ of a 10,000 SF building, you would pay for ½ of the OPEX of the property since you are likely responsible for ½ of the wear and tear of shared spaces.
However, you’ll often see CAM charged in leases as a per square foot rate, e.g. $2/sf. In these cases where CAM is paid to the landlord before the expenses are incurred, the tenant is usually entitled to a year end reconciliation of expenses, the ability to inspect the books, and a refund in the event of overpayment.
The best way to understand OPEX is to ask a landlord for the historical financials and ask existing tenants about their experience.
So, what does it really cost me?
Remember the above example where a $20 lease on 2,000 sf had a monthly base rent of $3,333.33/month? Now let’s add the NNN to find the actual cost.
- There is a $2/sf CAM fee
- Estimated taxes are $3.42/sf
- Insurance will be $0.50/sf
- And you’ll also be required to pay for your own utilities so add another $0.61/sf.
In other words, on top of your base rent, you’d pay $6.53 in NNN so your total lease cost would be:
- $20/sf Base + $6.53 NNN = $26.53/sf
- Total Annual Rent = $26.53/sf * 2,000 sf = $53,060
- Total Monthly Rent = $53,060/12 = $4421.67/month.
The bottom line is that NNN leases pass on the costs associated with a building to the tenant and it’s therefore critical that the tenant has a firm grasp on each of the drivers of the triple nets before committing to a lease.