In commercial real estate, whether it be for a retail, office or industrial lease, the terms “triple net” and “gross net” come up often.
Learning the difference between the two could make all the difference in reaching an agreement that is mutually beneficial for the tenant and property manager.
Often referred to as a net-net-net (NNN) lease, the triple net is a common structure for commercial leasing these days. With this lease structure, tenants agree to pay, in addition to the base rent, a cost covering Common Area Maintenance (CAM), real estate taxes and insurance as well as other property expenses.
Essentially, charges included under a triple net lease often cover everything except for the floor, foundation and roof of the property. As a landlord, you’re not burdened with direct expenses that result from owning a property.
Let’s look at an example. If you take a small retail building with three tenants, each taking up a third of the space and you have expenses that equate to $12,000 per year, or $1,000 per month, tenants will pay $333, or 33 percent, each month on top of base rent.
Sophisticated tenants often resort to capping their triple net lease, which is often quoted annually by the property manager. After about 90 days pass in the new year, tenants typically reconcile expenses from the previous year and set a new budget for the next.
I’ll note that this is not always the case. Hybrid forms of the triple net and gross lease exist. A double net lease acts as a prime example. With a double net, the tenant could be paying all expenses with the exception of property taxes, for example. It’s that simple.
Conversely, a gross lease requires the owner to pay all variable expenses associated with the property while the tenant agrees to pay a singular rate through the year. In this scenario, fluctuations in taxes or insurance, for example, have no impact on the tenant.
Surely, the safety of knowing exactly what is required each month through the contract provides a sense of comfort for tenants, but for landlords, it gets a bit more complicated when the property is in need of repair or tax or insurance costs creep up.
In this scenario, landlords can consider the cost of property when determining rental cost. With this, monthly rental fees can cover a variety of costs associated with maintaining the property.
Troy Muljat is a Washington State certified commercial appraiser and broker with over 25 years of experience in the commercial real estate industry. He holds the Certified Commercial Investment Member (CCIM) and Certified Property Manager® (CPM) designations through the National Association of Realtors.He specializes in brokerage, leasing, property management, development, and commercial appraisal.Visit TroyMuljat.com for more information about Troy.