In the world of commercial real estate, nothing is as it seems. At least not at first.
Take rental rates.
You may be comparing several places available for lease, with a $/SF quote, so you can compare apples to apples… but then there are those cryptic words:
“full service”, or “triple net”, or worse yet: “NNN”.
Someone please translate! Why is it so difficult?
It basically comes down to the building, the user type, and landlord preference.
Let me give you an example: Office buildings.
If you owned an office building, it would be easy enough to get a good estimate of what it would cost in electric, gas, water, etc. for 40-50 hours a week for a typical office tenant.
No matter which tenant. Office is office whether it’s a software company, an accountant, or an office for a construction company.
A typical office uses only so much in utilities in a given week. Other costs are fairly fixed as well.
It’s pretty easy to estimate those costs, therefore many office building landlords are comfortable paying all of those costs and quoting simple “full service” rate, which includes the landlord paying for utilities, real estate taxes and property insurance on the building.
However, this isn’t always the case.
Due to building nuances, landlord sophistication, or lack thereof, you may be asked to pay for your own share of utility costs, property insurance, real estate taxes or maintenance.
An industrial tenant, with heavy electrical usage for equipment, welders, etc. or a dental office with plumbing in every room, would have an above average usage of electric or water directly related to their business. Or their use may raise the property insurance costs.
Therefore, may find these types of spaces quoted with a base rate, and the tenant paying for their share of the utilities, real estate taxes and/or property insurance.
Which brings us to “triple net”, or NNN leases, and relates to the amount the landlord would receive in base rent “net” of the three costs to occupy space being Utilities, Real Estate Taxes and Property Insurance.
Or as stated at The Motley Fool:
A triple net lease (or "nnn" lease) is a form of real-estate lease agreement where the tenant or lessee is responsible for the ongoing expenses of the property, including real estate taxes, building insurance, and maintenance, in addition to paying the rent and utilities. (https://www.fool.com/knowledge-center/what-is-a-triple-net-lease.aspx)
For demonstration purposes, here is an example of 1 property quoted both ways:
This assumes you know, or the landlord can show, actual costs related to taxes, utilities and insurance on the premises.
From here it can, and usually does, get more complicated, but understanding who pays for these additional expenses and drilling down on how much they actually cost before you sign in the case of a NNN lease, is at the heart of the two different ways of quoting rates and will help you compare apples to apples on your next leased property.
I hope this helps, and there certainly is a lot more out there on the web if you want take a deep dive.
But if you’re already in the “more complicated” stage and prefer talking directly to someone about your particular situation, I’d be happy to help sort it out with you - just email me at firstname.lastname@example.org
Darin Shriver is a Commercial Restate Consultant at Beynon and Co. who has saved clients tremendous amounts of time through his understanding of the commercial real estate markets and negotiating nuances in the South Hills of Pittsburgh and Washington County, PA.