AVP Leasing, Simone Development Companies.
Commercial landlords typically quote their property rental rates in either triple net (NNN) or gross rental rates (GROSS) on a per square foot (PSF) basis. What are the differences and how can you easily evaluate between both options?
If you are reading this you are probably renting or looking to rent a commercial space for your business. Let’s assume that you are looking to sign a new lease and narrowed down your search to two locations. Landlord A is asking $15.00 PSF NNN and Landlord B is asking $20.00 PSF GROSS. All else being equal (location, move costs, renovations, etc.), what is the difference between NNN and GROSS rents, and how do you compare the two properties when landlords are quoting different rental structures?
First, let’s discuss what a pure triple net lease (NNN) is and how it is typically defined. Simply stated, NNN rentals are broken into three parts: rent plus the “Nets,” common area maintenance, insurance and real estate taxes. The NNN lease structure shifts the landlord’s common area maintenance (CAM), insurance (INS) and real estate taxes (TAX) directly to the tenant. Therefore, the landlord will either provide the maintenance and bill it back to the tenant or the tenant will be required to perform the maintenance on their own and absorb the CAM costs directly. Either way, the tenant will be required to pay RENT + CAM + INS + TAX = Total Rent. In this case, ask the landlord for their historical or estimated CAM charges. Real estate taxes are public record and can usually be confirmed on the municipality assessor’s web portal.
Let’s use the following assumptions: The landlord provides the maintenance, and you are informed that the CAM = $4.50 PSF, INS = $0.50 and TAX = $2.50 PSF. Therefore the total rental obligation of Option A is $15.00 + $4.50 + $0.50 + $2.50 = $22.50 GROSS PSF.
Option B, the Landlord has offered a rental rate of $20.00 PSF GROSS and how does this compare to Option A? Gross rental rates differ from NNN rates in that gross rental rates are quoted with the CAM, INS and TAX already included in the base rental number. Option B’s Landlord estimates the CAM to be $4.00, INS to be $0.50 and TAX to be $1.50 PSF. Why is this important? To compare leases, which are being quoted on different rental bases, the tenant needs an apples-to-apples method to evaluate which deal is better economically. In this case, Option B is $20.00 – $4.00 – $0.50 – $1.50 = $14.00 NNN PSF.
Confused as to which option is more economical?
At face value, Option B appears to be more expensive, right? Option B is clearly $5.00 PSF more than Option A. However, when you “GROSS up” Option A’s NNN rental components (RENT + CAM + INS + TAX), it’s clear that Option B is actually less costly by $2.50 per PSF.
So, where do you go from here? Consider these three helpful tips:
1. If you still prefer Option A but you’re not sure you’re getting a good price, negotiate with Landlord A and feel free to share the numbers from Option B. They may have room in their numbers to be able to match or better yet beat the all-in price of Option B.
2. An experienced commercial real estate broker can help you navigate the negotiations and assist you with finding the best property that’s the right price for you.
3. Doing business with an experienced, reputable landlord is strongly recommended.
Finally, there are a few other factors to consider when evaluating NNN versus GROSS leases. Ask the landlord or your real estate broker this vital question: Who is responsible for the repair, replacement and costs associated thereof for the building structure, roof, mechanicals, sprinklers and utility services coming into the building? These items can be the source of unexpected costs once in occupancy.
Best of luck with your commercial property search!