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Triple Net Lease Glossary

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Welcome to our Triple Net Lease Glossary! If you are a real estate investor or a commercial property owner, you have probably heard the term "triple net lease" before. A triple net lease is a type of commercial lease agreement in which the tenant is responsible for paying all three major expenses: property taxes, insurance, and maintenance costs. However, triple net leases can be complex and filled with industry-specific terminology that can be confusing for those who are new to the commercial real estate market. That's where our Triple Net Lease Glossary comes in.

Our glossary is designed to help you navigate the world of triple net leases and understand the various terms used in the industry. Whether you're looking to buy, sell, or lease a commercial property, our glossary will provide you with the knowledge and tools you need to make informed decisions. From common terms like "base rent" and "common area maintenance" to more specialized terms like "percentage rent" and "expense stop," our glossary will provide you with a comprehensive list of definitions and explanations for all the important terms you need to know.

So, whether you're a seasoned real estate investor or just starting out in the commercial property market, our Triple Net Lease Glossary is a valuable resource that will help you navigate the world of triple net leases and make informed decisions for your business.

Absolute Net Lease

A type of triple net lease where the tenant is responsible for all expenses related to the property, including insurance, taxes, and maintenance.

Actual Cash Value

The value of a property or asset, taking into account depreciation and wear and tear.

Addendum

An additional document or clause that is added to a lease agreement to modify or clarify its terms.

Base Rent

The fixed rent amount that a tenant pays to the landlord for the use of the property.

Base Year

The initial year of a lease term used to calculate the tenant's pro-rata share of expenses.

CAM (Common Area Maintenance)

The expenses incurred to maintain common areas in a property such as lobbies, parking lots, and other shared spaces.

Capital Expenditures

The expenses related to the acquisition or improvement of long-term assets, such as buildings or equipment.

Capital Gain

A capital gain refers to the profit that an investor makes from the sale of an investment property that has appreciated in value over time. This capital gain is typically subject to taxes, but by utilizing a 1031 exchange, investors can defer those taxes by reinvesting the proceeds from the sale into another like-kind property.

To qualify for a 1031 exchange, the new property must be similar in nature and purpose to the old property, and the entire proceeds from the sale must be reinvested into the new property. By deferring the capital gains taxes through a 1031 exchange, investors can continue to grow their real estate investments without having to pay taxes on the gains until they sell the new property.

Capital Gain or Loss

A capital gain or loss refers to the difference between the amount paid for a property and the amount received when it is sold. If the selling price is higher than the purchase price, the taxpayer has a capital gain, and if the selling price is lower than the purchase price, the taxpayer has a capital loss.

In a 1031 exchange, the capital gain or loss on the relinquished property is deferred rather than realized, meaning that the taxpayer does not have to pay taxes on the gain or loss at the time of the sale. Instead, the gain or loss is carried forward and applied to the replacement property acquired in the exchange. This can provide significant tax benefits to taxpayers who are looking to sell one property and acquire another.

Capital Gain Tax

Capital Gain Tax refers to the tax imposed on the profit realized from the sale of an asset that has increased in value over time. In the context of a 1031 exchange, a capital gain tax would apply to the difference between the sale price of the original property and its adjusted basis (i.e., the original cost plus any capital improvements made during ownership).

However, if the property owner uses the proceeds from the sale of the original property to acquire a like-kind replacement property through a 1031 exchange, they may be able to defer paying capital gain taxes on the sale of the original property until the sale of the replacement property. This allows them to reinvest the full sale proceeds into the new property, thus maximizing their investment potential.

Capitalization Rate

The ratio used to determine the value of an income-producing property based on its net operating income.

Contingency

A clause in a lease agreement that outlines specific circumstances under which either party may terminate the lease.

Debt Service

Debt service refers to the amount of money required to make mortgage payments on a property, including principal and interest.

When a property owner decides to participate in a 1031 exchange, they may choose to use some or all of the proceeds from the sale of their property to acquire a replacement property. If they choose to finance the replacement property with a mortgage, the debt service on that mortgage is an important factor to consider.

The debt service is typically calculated on a monthly basis and is based on the outstanding principal balance of the mortgage, as well as the interest rate and loan term. Property owners should carefully consider the debt service of any potential replacement property to ensure that it is manageable and fits within their overall investment strategy.

Default

A breach of the terms of a lease agreement, such as failure to pay rent or maintain the property.

Double Net Lease

A type of lease where the tenant is responsible for two of the three primary expenses, typically taxes and insurance, while the landlord is responsible for maintenance.

Easement

The right to use a portion of another person's property for a specific purpose, such as a shared driveway.

Effective Rent

The total amount of rent paid over the lease term, taking into account any rent concessions or incentives.

Escalation Clause

A clause in a lease agreement that allows for rent increases over the term of the lease.

Estoppel Certificate

A legal document signed by the tenant that confirms the terms of the lease agreement and any outstanding obligations.

Exclusive Use

A clause in a lease agreement that restricts the landlord from leasing space to another tenant engaged in the same business or industry.

Expense Stop

A predetermined maximum amount that a landlord will pay towards certain expenses, with the tenant responsible for any expenses exceeding that amount.

Fair Market Value

The price that a property would sell for under normal market conditions.

Fixed Rent

The amount of rent that remains constant throughout the lease term.

Force Majeure

A clause in a lease agreement that excuses the parties from performing their obligations in the event of unforeseeable circumstances beyond their control.

Full Service Lease

A type of lease where the landlord is responsible for all expenses related to the property, including CAM, taxes, insurance, and maintenance.

Gross Lease

A type of lease where the landlord is responsible for all expenses related to the property, including CAM, taxes, insurance, and maintenance.

Ground Lease

A type of lease where the tenant leases the land and is responsible for constructing the building and paying for all associated expenses.

HVAC

Heating, ventilation, and air conditioning systems.

Improvements

For land or buildings, improvements (also known as capital improvements) are the expenses of permanently upgrading your property rather than maintaining or repairing it. Instead of taking a deduction for the cost of improvements in the year paid, you add the cost of the improvements to the basis of the property. If the property you improved is a building that is being depreciated, you must depreciate the improvements over the same useful life as the building.

Index Lease

A type of lease where the rent is tied to a specific index, such as the Consumer Price Index or the Producer Price Index.

Landlord

The owner or manager of a property who leases it to a tenant.

Late Payment Penalty

A fee charged to the tenant for late payment of rent.

Lease

A contract between a landlord and tenant that sets forth the terms and conditions of a rental agreement.

Leasehold Improvements

Any alterations or improvements made to a property by the tenant, typically with the landlord's approval.

Lessee

The tenant who leases a property from the landlord.

Lessor

The landlord who leases a property to the tenant.

Letter Of Credit

A financial instrument used to guarantee payment to the landlord, typically issued by a bank on behalf of the tenant.

Maintenance

The upkeep and repair of a property.

Market Rent

The rent that a property could command under normal market conditions.

Modified Gross Lease

A type of lease where the tenant is responsible for some of the expenses related to the property, but the landlord pays for others, typically CAM and taxes.

Net Lease

A lease in which the tenant is responsible for paying operating expenses, such as property taxes, insurance, and maintenance.

Net Operating Income (NOI)

The income generated by a property after deducting operating expenses but before deducting debt service.

Non-Disturbance Clause

A clause in a lease agreement that ensures the tenant's lease will not be terminated if the landlord defaults on their mortgage.

Operating Expenses

The costs associated with operating a property, such as utilities, maintenance, and management fees.

Option To Renew

A clause in a lease agreement that gives the tenant the right to renew the lease for an additional term.

Percentage Rent

Rent that is calculated as a percentage of the tenant's gross sales.

Personal Guarantee

A legal promise by an individual to pay for the tenant's obligations under the lease agreement.

Portion Of The Building

The specific area of the property that the tenant leases.

Pro Rata Share

The portion of expenses that a tenant is responsible for paying, typically based on the square footage of their leased space.

Property Management

The management and operation of a property, including leasing, maintenance, and accounting.

Property Tax

A tax levied by the government on the assessed value of a property.

Recapture Clause

A clause in a lease agreement that allows the landlord to terminate the lease and take back possession of the property under certain circumstances.

Renewal Option

A clause in a lease agreement that gives the tenant the option to renew the lease for an additional term.

Rent

Payment made by a tenant to the owner of a property in exchange for the right to use and occupy the property.

Rent Abatement

A temporary suspension or reduction of rent, typically granted to the tenant in the event of property damage or other disruptions.

Rent Commencement Date

The date on which the tenant is obligated to begin paying rent.

Rentable Area

The total square footage of a property that is available for lease, including common areas.

Rentable Square Footage

The total square footage of a property that is available for lease, including common areas.

Sale-Leaseback

A transaction where the owner of a property sells it to a buyer and then leases it back from the buyer.

Security Deposit

A sum of money paid by a tenant to a landlord to cover any damages or unpaid rent at the end of the lease.

SNDA (Subordination, Non-Disturbance, and Attornment)

A legal agreement between the landlord, tenant, and lender that outlines the rights of each party in the event of default.

Square Footage

The measurement of the area of a property.

Sublease

A lease agreement between a tenant and a third party for a portion of the leased space.

Subordination

A clause in a lease agreement that makes the tenant's lease subordinate to the landlord's mortgage.

Tenant

The individual or entity who leases the property from the landlord.

Tenant Improvement Allowance

The amount of money that the landlord agrees to spend on improvements to the leased space.

Triple Net Lease (NNN)

A lease in which the tenant pays for all of the property’s operating expenses, including property taxes, insurance, and maintenance

Turnkey Lease

A type of lease where the landlord provides a fully equipped and furnished space to the tenant.

UCC (Uniform Commercial Code)

A set of laws that govern commercial transactions, including leases.

Use Clause

A clause in a lease agreement that specifies how the tenant may use the leased space.

Utilities

The services necessary for the operation of a property, such as water, electricity, and gas.

Vacancy Rate

The percentage of available space in a property that is not leased.

Waiver

A relinquishment of a right or claim, typically granted by one party to another.

Warranty Of Habitability

A guarantee that a rental property is fit for human habitation and meets certain minimum standards.

Work Letter

A document that outlines the specific improvements or alterations that the landlord will make to the leased space.

Yield

The return on an investment, typically expressed as a percentage of the initial investment.

Zoning

The regulation of land use by a local government, including restrictions on the types of activities that may take place in a particular area.

Anchor Tenant

Anchor tenant is the tenant that acts as the primary draw to a commercial property. It is usually the largest tenant in a shopping center or retail development. A common example is a grocery store.

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