Triple Net Lease (NNN) agreements are highly prevalent in commercial real estate, particularly for industrial properties. A recent example is FIBRA Nova’s agreement to manage and lease 1,654 hectares of agri-food land in Chihuahua between 2021 and 2036. In this contract, similar to any other NNN agreement, the tenant is responsible for paying the monthly rent and covering all the operating and maintenance expenses associated with the property.

The three "nets" referred to in the term "triple net" are related to property taxes, maintenance and repair of common areas, and even the building itself, as well as property damage insurance. While the specific terms of a triple net lease contract may vary depending on the agreement between the landlord and tenant, in Mexico, additional payments for taxes, maintenance, and insurance typically increase the property's rental price by 10% to 20%. Taxes and insurance usually contribute to variations of around 2% to 5%, while maintenance leads to increases of 6% to 10% on the base rent.

Let's take, for instance, a 2023 listing for Class A industrial properties in five submarkets in Tijuana based on data collected by SiiLA. The sample in this Mexican northwestern region shows that, on average, costs for taxes, maintenance, and insurance increase the rental price by 8%: 4.5% for maintenance, 2% for insurance, and 1.5% for taxes. It's important to note that these percentages vary depending on property location, type of building, space size, and specific contract conditions.

Triple Net Lease contracts have both advantages and disadvantages for landlords and tenants.

Key Pros of Triple Net Leases

Advantages for the Landlord (Owner) include: a) Improved financial planning, as transferring operating and maintenance costs to the tenant provides greater certainty about net income; b) Enhanced property management efficiency, as the owner shifts maintenance and repairs financial burden to the tenant, preventing wear and depreciation of the property; and c) Reduced exposure to risks by holding the tenant responsible for unexpected expenses.

Advantages for the Tenant include: a) Greater operational control over the property, allowing them to adapt and manage the space according to their specific commercial needs; b) Foreknowledge of additional costs, enabling tenants to plan their budgets better and avoid unexpected financial burdens; c) Tax benefits as they become responsible for property taxes and insurance interests, as well as financial benefits, as upfront payment often reduces costs in the medium and long term.

Key Cons of Triple Net Leases

Disadvantages for the Landlord include: a) Fixed income, which could become insufficient if there is a considerable increase in operating and maintenance costs, leading to reduced profit margins; b) Difficulty in evaluating tenants, as it is essential to find tenants with sufficient liquidity and income to cover rent and operating costs in the medium and long term; c) Prolonged vacancy, as additional costs to rent can make it challenging to attract and retain tenants, especially during periods of crisis and/or economic recovery.

Disadvantages for the Tenant include: a) Increased financial burden due to taxes, maintenance, and insurance costs; b) Limited flexibility, as contractual conditions may make it difficult to make changes to the space or terminate the contract early; c) Risk of unexpected costs, as significant increases in operating or maintenance expenses due to inflation or contractual clauses could pose difficulties for the tenant in meeting their responsibilities and impact their budget.

For more information on types of contracts and trends in the commercial real estate market, continue exploring SiiLA REsource or contact us at contacto@siila.com.mx.