Real estate is a confusing world of jargon and intricacies. When a tenant signs a lease, they may have just signed on to more than they bargained for. If you're not in the real estate business than it can be easy to assume that there is only one type of lease, but, in fact, there are many different types of leases. A fairly common lease, especially with commercial renting, is the triple net lease. The triple net lease may seem like a fairly simple type of lease, but understanding what it entails before signing on to it can save a lot of financial heartache down the road.
Before explaining all the details of the triple net lease, some background on the different types of leases may be in order. There are two main types of leases, with many sub-divisions within those two groups. A net lease is where the tenant is responsible for paying not only rent, but all, or at least some, of all the costs included in the maintenance of the building. A gross lease is thought of as the opposite of a net lease; the tenant pays rent, but the landlord pays for the other costs of the building. A gross lease is what a tenant should be aiming for while a net lease is often what the landlord will be striving to get.
A triple net lease is clearly a type of net lease, but what does the triple signify? In a triple net lease, the tenant will pay a base rent along with property taxes, building insurance, and common area maintenance. The tenant also handles their costs in the property such as utilities, and their taxes. Some triple net leases will include provisions that make it clearer that the tenant is responsible for all of the costs of the building, making a triple net lease for close to an absolute net lease. The base rent will often be lower than you might expect to help offset the costs of the other stipulations of the lease. While leases differ for each property, one of the more common ways that landlords will bill the tenant is to have the tenant pay reimbursements. Reimbursements are simply the real-estate term for the amount that the tenant pays for the costs of the building throughout the year. Many triple net leases also include a provision to account for inflation, where the agreed cost of the reimbursements will go up by a set amount or percent each year for the duration of the lease. This does not include the fact the tenant will also have to pay an increased amount if the property taxes in the area go up unexpectedly.
Triple net leases are commonly issued to single-occupancy buildings in the name of simplicity, but this is not always the case. In the case of multiple occupancies, the cost of taxes, insurance, and maintenance are divided up between the tenants. What each tenant would pay is proportional to their use of the building, so if one tenant rents twenty percent of the building they would pay twenty percent of the taxes, insurance, and maintenance.
Now that triple net lease is a little bit clearer let's look at an example of how one would work. Bret's Better Bakery is looking for a new location. It finally finds the perfect spot, and the landlord leases it to Bret with a triple net lease. The rent for the building comes to ten thousand dollars per year. During the year, the landlord pays five hundred dollars in taxes, another five hundred in insurance. The landlord also pays a total of one thousand dollars for maintenance, utilities, and security. Combined all of those costs add up to two thousand dollars. So at the end of the year Bret's Better Bakery pays the ten thousand plus the two thousand dollars in reimbursements, making his total rent come to twelve thousand dollars. The next year taxes rise unexpectedly to seven hundred fifty dollars. On top of that the building suffers some damage making the maintenance cost go up five hundred dollars, which in turn causes the insurance to rise another two hundred and fifty dollars. That increase adds up to a thousand dollars on top of the regular rates, on top of the base rent meaning that the second year Bret's Better Bakery pays thirteen thousand dollars. It's unlikely that all of the components of the lease would rise simultaneously, but if they do the tenant still has to pay. The triple net lease can be tricky for tenants, but knowing what to look for when reading the lease can help avoid getting stuck with a price tag you didn't expect.