Nowadays, more and more people are trying to make their mark by being entrepreneurs. If you are one of those individuals, perhaps you are thrilled about starting your own business, but you are also worried. Venturing into a business may come with high returns, but it also poses several risks, leading to you losing a ton financially. Hence, it is crucial to research the industry you want to penetrate thoroughly. You may want to start by analyzing the costs of renting a space for your business – like the triple net lease or NNN.
There is a contract when you enter into a deal or a lease agreement. This contract highlights the responsibilities of the tenant and the landlord. And in a triple net (NNN) lease, the tenant is responsible for three (3) property expenses, namely.
This tax is quoted based on the value of the property. It is paid by the owner or any other legal entity tasked to do so. In the case of an NNN lease, the tenant is responsible for paying such tax.
Property taxes are calculated and assigned by the local government – thus, it varies. The collected amount is used to fund the city or town’s water and sewer works, fire protection, road construction, etc.
A real estate tax is often used interchangeably with property tax, but they are not the same. A real estate tax is one of the many types of property taxes. A property tax goes for both real property and any tangible personal asset.
Insurance comes in many forms – from life, auto, and building insurance. In a triple net (NNN) lease, one of the expenses paid for by the tenant, which is added to the base rent, is the building insurance.
This type of insurance covers your home from potential damages caused by disasters such as storms, earthquakes, floods, etc. Moreover, it can also hedge your loss if you ever experience theft or vandalism in your home.
Purchasing an insurance policy and making timely premium payments will ensure that you are covered when unfortunate scenarios happen. You do not have to pay for the entire cost of loss and damages out of your pocket with building insurance.
This is also one of the expenses that are shouldered by the tenant aside from the base rent. In a triple lease (NNN) agreement, there is a portion dedicated to “CAM” or common area maintenance.
This encompasses any costs attributed to the maintenance and repair of the space. It may include security, cleaning, lighting, etc. As a tenant, knowing that your place and secure and well-managed will give you a sense of ease. However, note that some expenses could be negotiated – like roofing. The landlord pays for the roof replacement most of the time, which increases the property’s value by up to 8%.
How Triple Net (NNN) Leases are Calculated
Triple net (NNN) leases are quoted based on the base rent cost plus all pro-rata operating expenses – those attributed to repairing and maintaining the commercial space.
As a tenant, you will be responsible for paying such costs other than your rent and utilities. Thus, getting an estimate of the potential amount you will shoulder will prepare you. You may use an NNN/Commercial Lease Calculator for that.
A commercial lease is typically calculated by finding the price per square foot. The lease varies based on the type of retail space and the town or area where it is located. So, before starting a business, you may want to check the typical rates in your city. So, you may be thinking of how to figure out the price per square foot. Let me give you some examples to grasp how this is quoted. How to calculate the price per square foot? It may be annually or monthly.
You have found a potential rental space for your business. The landlord is asking for $15 per square foot for 4000 square feet. Just multiply the rental rate per square foot by the full measure of the area.
So, 4000 square feet x $15 = $60,000 per year. If you divide this by 12, you will get a monthly rate of $5,000.
In this scenario, the owner is demanding $1.25 per square foot for a 4000 square-foot commercial space. So, following the same formula above, which is the price per square foot multiplied by the total space, you will get $5,000. This amount is the same as the $60,000 divided by 12. It is crucial to know the difference between the two to calculate the amount you have to pay accurately.
Now that you know how to compute your annual or monthly rental rate, you can start quoting the total NNN lease. You must add the operating expense, repair, and maintenance to your base rental rate.
How to calculate the price per square foot? It depends on the city you will be renting or residing in. The minimum is usually $1 per square foot, and the maximum amount is around $20. On top of the monthly base rent of $5,000, the price of NNN per square foot is $6 in your city. So, $6 x 4000 square feet = $24,000. This $24,000 is the estimated operating expense per year, and the monthly is $2,000.
Hence, add $24,000 to your annual commercial lease or $2,000 to your monthly lease, and you will get the total rate per year. So, that is base rent plus NNN lease. But, you also have to consider all the utility expenses, like water and electricity, that you have to pay. You may want to check out the average price per square foot by zip code calculators to check precisely the costs charged in your area.
A gross lease is like a simplified version of the NNN lease. It is calculated on an “all-in” basis. So, the tenant pays a lump-sum amount, and the landlord manages the payment for the operating expenses – insurance, taxes, maintenance, etc. The gross square footage is defined as the entire rentable area owned by the landlord – whether it is used or not.
A triple net lease covers the base rent plus all pro-rata operating expenses like maintenance and repairs. It is beneficial to the landlord to manage such costs, for the tenants shoulder them. Meanwhile, the tenants are given longer leases with NNN.
There are a lot of terms and costs attributed to renting a space. It may be overwhelming to know about the triple net lease, common area maintenance (CAM), and gross lease. However, learning about it will ensure that you pay for the correct costs. So, you may want to do your research to ensure that you are knowledgeable enough before paying anything.
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