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Office Leasing 101: Understanding the Triple Net

Office Leasing 101: Understanding the Triple Net

Triple net is a common term in medical office leases, yet it is often misunderstood. Knowing what a triple net is - and isn't - will help practices understand the true costs of their office leases beyond the base rental rate. And, understanding these costs will help practices negotiate better leases. In some markets, the triple net lease is also referred to as a "Net lease," an "NNN" lease, and as a "Net-Net-Net" lease.

The triple net lease is one in which the tenant pays for core expenses above and beyond their base rental rate. These expenses can include utilities, maintenance, and taxes for the office suite. Unfortunately, triple nets are not always simple agreements. If you have seen one triple net lease, you have seen one triple net lease. For example, some triple nets include water/sewer as part of the base rent; others do not.

In reviewing a lease determine which expenses are included in your base rent, and which expenses must be borne by the practice outside of the monthly rent. As you review this list, bear in mind there is a dollar figure associated with each. What you pay is something the landlord does not have to pay; conversely, any element that you can negotiate as part of your base rental rate is money in your pocket. It never, ever hurts to ask, particularly in a depressed commercial real estate market such as the one we are facing.

Here's a list of expenses to consider:

1. Utilities
• Water and Sewer
• Electricity
• Internet
• Phone

2. Taxes
• Are real estate taxes borne by the landlord or passed on to tenants?

3. Insurance
• Your responsibility should be to insure the contents of your suite; the landlord should insure the balance of the facility
• Make sure the landlord's property, casualty, and liability insurance coverage are all adequate; review rent abatement language in the event that the building becomes uninhabitable due to fire or another disaster

4. Common Area Maintenance Charges (see further comments below)
• HVAC routine maintenance (often, leases require tenants to contract for annual HVAC maintenance
• HVAC repair/replacement
• Parking lot maintenance, including snow removal and periodic line painting
• Utilities for common areas such as parking lot lighting, building lobbies, and public restrooms
• Common area maintenance and upgrades such as carpet replacement, exterior window washing
• Grounds maintenance
• Garbage and trash removal
• Hazardous waste removal

5. Interior maintenance
• Light bulb replacement
• Toilet repair, etc.

Many triple nets include provisions for tenants to pay pro-rata shares of common area maintenance (CAM) expenses. It is critical that a practice understand its exposure to CAM expenses. If CAM expenses are part of the lease, negotiate caps on these expenses to limit your exposure and request that an annual statement of CAM expenses and pro-rata distribution be provided to your practice.

If housekeeping/janitorial is an expense that is borne by the practice, talk to your neighbors and line up the same housekeeping service at a discounted rate. Do the same for other common expenses such as hazardous waste and document destruction. In my market, the going rate for housekeeping services is $1.20 - $1.50 per square foot. For a 5,000-square-foot office, the annual cost thus may range from $6,000 to $7,500, so there can be substantive savings by negotiating together. And don't forget that underused offices do not need to be cleaned every day. Going to three-days-a-week housekeeping can save money, too.

Understanding your expense exposure is one of the most important facets of a due diligence lease review. It allows you to compare the true costs of one potential site versus another and then to negotiate the best lease for the practice. I have made mistakes in not understanding the true cost of an office, having been wooed by a low rental rate. Following the above guidance, I no longer make such mistakes, and I hope you will not, either.

Lucien W. Roberts, III, MHA, FACMPE, is associate administrator of business development at MCV Physicians. He also consults with medical groups and health systems in areas such as compliance, physician compensation, negotiation, strategic planning, and billing/collections. He may be reached at lucien.roberts@yahoo.com.

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