Friday, September 2, 2016

Real Estate & Related Terms Explained: Triple Net

Considering we do lots of commercial leasing, we come across triple net leasing every day. Very often we hear from potential tenants the same question: what does triple net mean? Today we are going to explain triple net leasing, so the next time you lease commercial space you’ll be able to understand your lease obligations.

What is a Triple Net Lease?

The technical definition of triple net leasing goes like this: a lease arrangement in which the tenant is responsible for paying in addition to their base rent all of operating expenses of the property. This includes property taxes, insurance and maintenance. Basically, you pay a base rent (or net rent as it is sometimes called) to the landlord, and you also pay your proportionate share of the operating costs of the property. So that the landlord is not out of pocket for any of the operating costs of the plaza, the tenant pays their share as they would if they owned the property. Typical operating cost items can include all of the following: property taxes, insurance, maintenance, repairs, common utilities, snow removal, landscaping, property management and janitorial (in some cases).

How is a Triple Net Lease Administered?

To use a plaza with multiple tenants as an example, the landlord will come up with a budget for operating costs (typically referred to as an operating cost budget), that sets out the yearly costs of operating the property, including the typical items mentioned above. They usually take that total and divide it by the total square footage of the property to come up with $/sqft amount (ie $100,000 operating cost budget, divided by 10,000’ in the plaza, equates to $10.00/sqft for operating costs).  This operating cost amount is then added to your base rent to get to your gross rent (ie base rent of $15.00/ft plus $10.00/ft operating costs equals $25.00/ft). You multiply this amount by your square footage and this gives you your total annual rent. Divide that by 12 and that will give you your monthly rent. By doing the operating costs this way, it smoothes out the costs over the year for the tenant, instead of giving them lump sum bills as they come up. Essentially the landlord pays the operating costs and then charges them back to the tenant throughout the year. In the case where you are leasing an entire building, this can be simpler and the tenant can pay the operating costs directly themselves as there isn’t a proportionate amount to share with other tenants.

What Else Should I Know About Triple Net Leasing?

By year's end, the landlord should reconcile the actual operating costs in relation to what was budgeted. At that point they will most likely either owe you a balance if the actual comes in less than the budgeted, or you owe them if the actual comes higher than budgeted. Some of the volatile operating expenses that can swing year to year include snow removal, common utilities and repairs/maintenance.

All triple net leases are slightly different in the way they are administered, but this gives you a basic understanding of the concept of triple net and what you should know.

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