Commercial real estate leasing contracts can be complicated, especially when you’re talking about a large building with a lot of tenants. There can be confusing words thrown in there, including a "triple net lease."
The reality is that a triple net lease isn’t all that complicated and is quite popular. It basically shifts some of the costs of owning a building onto the tenant or tenants. The main benefit of a triple net lease is that it can reduce the cost of rent for the tenant, but the tenant also assumes more risk.
What Is a Triple Net Lease?
A triple net lease is a rental or leasing contract where the tenant, or lessee, agrees to pay for all the expenses of the property. This typically includes real estate taxes, building insurance, and maintenance. For all intents and purposes, it’s an agreement where the tenant essentially acts as an owner of the building in all but name, and is responsible for the building as if they were the owner.
Triple net leases are mainly used in the commercial real estate arena, and can also apply to buildings with multiple tenants. If taxes, insurance, and maintenance are all spread out among multiple tenants, this reduces the risk and cost for the tenants.
Is a Triple Net Lease a Good Idea?
The primary advantage of a triple net lease from the tenant's point of view is the lower leasing cost. Since you’ll be required to either pay in full or pitch in for property taxes, insurance, and maintenance, your upfront rental costs will be much lower.
For the landlord, triple net leases reduce the cost of owning the building and also create a more predictable income stream. The costs of taxes and insurance are fairly consistent but do increase almost every year, and the cost of maintenance is a complete unknown.
Passing these costs off to the tenants allows the landlord to know exactly what income they can expect to receive from renting out the building.
Of course, triple net leases do carry some risk for the tenant, with maintenance being the primary cost that a tenant might have to confront. Property taxes and insurance are important but are usually fixed to a certain degree, at least in any given year.
But maintenance costs could vary considerably from year to year and could be considerable, so prospective tenants will want to factor in the condition of the building when considering a triple net lease.
What Does a Triple Net Lease Include?
Triple net leases are generally long-term leases and could be as long as 10 years or more in some cases. On a basic level, the terms of the lease include the tenant paying all or part of the costs of property taxes, insurance, and maintenance for the building.
In larger commercial-use buildings with many tenants, the tenant might also pay for things such as common areas, parking lots, security systems, and utilities. And since most triple net leases are long-term contracts, an inflation guard may be built into the contract to reflect rising costs.
What Does Your Landlord Pay in a Triple Net Lease?
Some triple net leases don’t pass on 100% of the maintenance costs to the tenant, although most do. But the landlord is still the owner of the building, which means they are ultimately responsible for any costs to repair the building if there isn’t a tenant.
If the tenant needs a minor repair in their space and decides not to fix it, the landlord will probably have to pay to fix it once the leasing contract expires.
Alternatively, some leases will allow the landlord to routinely inspect the property and fix any required maintenance issues themselves, but then pass the bill on to the tenant.
How Is a Triple Net Lease Calculated?
To calculate a triple net lease, you’ll have to consider multiple factors, such as the annual property tax amount, insurance, expected or average maintenance costs of the past few years, and the square footage of the building.
Once you have all those numbers, simply add them up and divide it by 12 to get your monthly amount. Then you can add that monthly number to your rent charge.
If there’s only one tenant in the building, you may not need to include the expected maintenance costs because the tenant will be responsible for all maintenance fees anyway. But with multiple tenants, you’ll want to factor in the maintenance cost in addition to any upkeep costs.
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How to Find a Triple Net Lease
Triple net leases are commonly used in commercial real estate contracts. If you’re a prospective tenant and are looking for a property, you can speak with a local commercial realtor about potential triple net lease deals in the area you want to rent.
Triple net lease arrangements are also commonly found in commercial real estate investment portfolios. These often include multiple high-grade commercial properties, such as office buildings, industrial parks, or shopping malls.
The Benefits of an Independent Insurance Agent
Triple net leases pass on the responsibility of paying for insurance to the tenant, but that doesn’t mean the owner or landlord is completely off the hook. Landlords will want to be listed as an additional insured on the tenant’s commercial insurance policy, and will probably want to make sure the insurance stays in force for the duration of the contract.
The landlord will also need to have an insurance plan in place if there aren’t any tenants and the building is vacant. An independent insurance agent can help sort through these problems and make sure all parties have the proper insurance coverage in place.
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