The Triple Net Lease

The triple net lease structure is one of five or so different leases. Full service, modified gross, triple net, single net, and percent rent, are some of the most common. Before setting up a lease, make sure you know which structure is most beneficial for the type of property you own and which is most effective to administer to your tenants. Today we are talking about triple net leases. We’ll talk about why you want them, and then how to bill your tenants accordingly.

The triple net lease, sometimes called the the net-net-net lease is most commonly used in single story warehouse, distribution, manufacturing, or retail sites where dividing the operating costs and expenses is straightforward. The triple nets, or the operating expenses, refer to property taxes, building insurance, and common area maintenance.

In a triple net lease, tenants should expect to pay for their share of the expenses necessary to maintain the property, like snow ploughing, landscaping, some building repairs, window and door repair or replacement, and a reasonable property management fee, just to name some.

Triple net leases benefit landlords because it gives the opportunity to pass all responsibility for operating expenses and headache of management to the tenants, which most often means that the tenants will be in charge of hiring their own contractors and doing their own maintenance on the space they are renting. If property taxes go up or snow ploughing goes through the roof, the tenant is responsible. Triple net leases also benefit the tenant because the landlord is not making a profit on any of the triple net portion of the lease payment, and the tenant is also able to manage its own contracts and relationships rather than outsourcing to the landlord who may not be as concerned with getting the best price or service from the vendors.

One typical way to bill a tenant for triple net expenses is by first estimating the taxes, insurance, and property maintenance  for the whole year based on the expense history and then setting a projected price per square foot that the tenant will pay in addition to the base rent amount every month. At the end of the year, the landlord will review the actual taxes, actual insurance, and actual maintenance costs, and then reconcile these costs with the estimates, providing a window of time of something like 15 or 30 days to reconcile the estimates with updated actual amount. Some landlords prefer reconciling these amounts more frequently, like on a quarterly or biannual basis, but the frequency doesn’t really matter as long as the tenant and landlords both agree on the arrangement. We recommend landlords shooting high on the estimated additional rent portion, so when the time to reconcile comes around, the landlord is not chasing the tenant around for money. But also, just thinking like a tenant, wouldn’t it feel good to get a check in the mail from your landlord once or twice a year?

To summarize, triple net leases are for industrial and retail buildings, they minimize maintenance for landlords, give transparency to tenants, and are billed on an estimated monthly basis and then reconciled at the end of the year.