Full service and triple net leases are two of the most popular lease agreement types used in commercial real estate. Even though both documents contain many similar provisions, they are quite different and should be used according to the type of property being leased. The main difference between a full service lease and a triple net lease (also referred to as NNN lease) is how they address the subject of real estate taxes, insurance, and other operating expenses associated with leasing the property.
Full Service Lease
As the name implies, a full service lease rental rate includes not only the rent for using the space (sometimes referred to as the “capital portion”), but also charges for all the building expenses and services, such as insurance, real estate taxes, utilities, trash removal, etc. The cost of these items is already factored in the full service lease rate and the landlord is responsible for coordinating and paying for these items. In addition, the landlord should provide a clearly itemized operating statement detailing the distribution of the full service lease rental rate amongst the various expenses. Typically full service leases are used in office buildings.
Operating Expense Stop
Full service leases may also have an operating expense stop provision. An operating expense stop is the maximum amount the landlord will pay towards the building expenses and services of its full service leases. Any costs exceeding the operating expense stop are passed through to the tenant, meaning tenant is responsible for paying the overage. Usually the operating expense stop is set to the amount of the estimated operating expenses for the first year of the lease term.
From the Lease Agreement
“Tenant, on the first day of each month during the Term, shall pay to Landlord, as Additional Rent, without demand, offset or deduction, an amount equal to 1/12 of its proportionate share (“Tenant’s Proportionate Share”) of the budgeted Operating Expenses as calculated by Landlord (prorated for any partial month) to the extent such Operating Expenses exceed the Operating Expense Stop.”
Triple Net Lease (NNN Lease)
In a triple net lease, the tenant is solely responsible for all expenses and services associated with its occupancy of the leased space. The three N’s in “NNN lease” refer to taxes, insurance and common area maintenance as the three items that the tenant will be paying for. The actual triple net rental rate is money being paid exclusively for the real estate and does not include charges for any of the other expenses. The landlord then imposes a CAM (common area maintenance) charge on the tenant, which covers real estate taxes, insurance and any additional expenses that landlord may incur in association with operating the property. Sometimes the tenant may be responsible for paying items such as utilities and trash pickup directly to the vendor providing the service. Most often triple net leases are offered on retail, flex and industrial properties.
It is very important to understand how your landlord handles operating expenses and services before you sign a lease. These costs need to be considered carefully when choosing a location, as they can significantly affect your bottom line in the long run. If comparing full service lease rates and triple net lease rates, always remember to first add the NNN expenses to the later, and then use the cumulative rate for comparison.