What Does Triple Net Mean When Leasing Office Space?

office LeaseMost office building owners either operate with a Base Year or Triple Net (NNN) lease.  At the end of the day both essentially mean that the landlord is passing along most if not all operating expenses (taxes, insurance, maintenance, repairs, utilities, etc.) to their tenants.

With a Triple Net (NNN) lease in addition to paying the base rental rate the landlord is is passing 100% of all operating expenses (taxes, insurance, maintenance) to their tenants.  At the beginning of each year the landlord will estimate what the NNN will be.  At the end of that year they will reconcile their books.  If the NNN increase then each tenant will receive a bill for their pro-rata share.  If the NNN decrease then each tenant will receive a credit.

For example let’s say in January 2014 you lease 4,000 sf in Westlake.  The asking base rental rate is $24 + an estimated $10 sf NNN.  During that year you pay $34 sf in rent.  At the end of 2014 the landlord will reconcile their books and determine what the actual operating expenses were for 2014.  If the actuals increase to $11 sf then you will be billed $4,000.  If the actually operating expenses decrease to $9 sf then you will be credited $4,000.

Because different landlord’s include or exclude certain items in their NNN tenants should always ask what is and what is not included.  It’s always important that you ask to see the last 3-5 years of NNN’s so you can find out if there have been any large increases or decreases and understand why.

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