A build to suit lease has various definitions. The simplest being any lease that references some construction to meet the tenant’s requirements. But there is much more to it than just that.
A build to suit lease has several essential components: 1) the Landlord work letter which specifies the work required to be completed by the Landlord before the Tenant takes possession; 2) other essential lease terms for the “build to suit” portion such as delivery date and further tenant improvement allowance for Tenant build out; and 3) a thorough understanding of how the lease it to be handled should the developer or new owner be involved following construction completion.
That being said, there are a number of different types of build to suit leases. It can sometimes even get a little confusing. But let’s try to clear thing up by taking a look at a few of the most common types of build to suit leases.
Single Net Lease (N)
In this lease, the tenant pays base rent plus a pro-rata share of the building's property tax (meaning a portion of the total bill based on the proportion of total building space leased by the tenant); the landlord covers all other building expenses. The tenant also pays utilities and janitorial services.
Double Net Lease (NN)
A double net lease (NN) is a lease agreement in which the tenant is responsible for property taxes and insurance premiums in addition to rent. All exterior and common area maintenance costs remain the responsibility of the landlord.
Triple Net Lease (NNN)
A triple net lease (NNN) is a lease agreement in which the tenant is responsible for all the expenses of operating the property, including both fixed and variable expenses, as well as rent. The tenant is required to pay the net amount for three types of costs: real estate taxes, building insurance, and common area maintenance. However, the landlord is responsible for structural repairs.
Absolute Net Leases
This type of lease is less common and more rigid than a NNN lease. This type of lease is often referred to as a bondable lease. In this structure, the tenant is responsible for all building expenses, no matter what, including structure and roof. Most often there is confusion between a NNN lease and an absolute net lease. This confusion often occurs when properties are listed or advertised as simple labels, such as triple net or full service. These terms are often commonly used by brokers and landlords, but may often conflict with the actual terms of the lease.
Net leases are usually long-term, generally ten to twenty years with a number of renewal options at fixed or formulae rates.
Build to suit development represents an advantageous, yet sometimes complex commercial real estate endeavor. And build to suit leases are significant commitments, so when it comes to addressing them, it’s important to understand all of your options and ask the right questions.