One of the most common commercial cannabis lease structures is what is commonly referred to as a “triple net” or “NNN” lease. Triple net cannabis leases allow landlords to pass on nearly all operational costs associated with a property to a tenant, which can be a big benefit for both landlords and tenants. Today, I’ll discuss the advantages of using triple net leases.
Net v. gross cannabis leases
When we talk about “net” leases, we mean leases where the tenant pays certain costs incurred with respect to the property. In an NNN lease, these are property taxes, insurance, and maintenance (hence, “triple” net). There can be fewer “N” leases, for example, in situations where a tenant pays only the taxes and insurance.
Some landlords may use “gross” leases. In a gross lease, a tenant pays rent and the landlord pays the operating expenses. Unlike with net leases, gross lease landlords absorb the above costs and so they will usually charge higher rates of rent to hedge against risks.
The type of lease used usually depends on (1) what the landlord wants (almost always the deciding factor), (2) negotiations between the parties, and (3) specific property factors. For example, leases for a building v. one suite in a multi-tenant building present different concerns, which I discuss more below.
Triple net cannabis landlord advantages
The most obvious benefit for triple net landlords is that the tenant either pays or reimburses the above costs. If a landlord used a gross lease, a tenant would still effectively pay costs (in the form of rent) but the landlord would need to be very precise in calculating rent up front and could risk losses if costs suddenly increase during the term.
If there is a catastrophic event that causes insurance premiums to increase substantially, the landlord could sleep safely knowing the tenant would have to deal with those costs. This makes sense, as the tenant actively operates the premises and can do more on a daily basis to protect against damage or destruction.
Most triple net leases put the onus on the tenant to maintain the property at its own cost, which is also a huge weight off any commercial landlord’s shoulders. In our real estate team‘s experience, most cannabis landlords don’t have experience in the cannabis industry. They are just happy to collect rent and make sure that the tenant complies with state law. Even if a triple net cannabis lease requires the landlord to do something, they usually can recoup their expenses from the tenant.
Triple net cannabis tenant advantages
You may be thinking “triple net cannabis leases sound great for the landlord but terrible for a tenant.” But often, this isn’t the case. The number one advantage for tenants is lower rent. Cannabis rent is almost always above market for other industries. Gross cannabis leases can be even more above market as explained above. This also may give tenants more leverage to negotiate for caps on increases. They may even be able to allocate certain expenses or improvements back to a landlord.
Multi-tenant properties can be even better for tenants. Landlords pool the costs for each tenant. These are called common area maintenance or “CAM” charges. Landlords can divide CAM charges by number of tenants or square footage of each premises. If two tenants had 6,000 and 4,000 square feet premises, the CAM charges would be 60/40.
In our experience, triple net leases are far more common than gross leases. They tend to be better for landlords, who have a lot more leverage in cannabis leases. But that doesn’t need to be so, as tenant’s can save – sometimes a lot – on a NNN lease. For more on cannabis leasing, please stay tuned to the Canna Law Blog.