Triple Net Lease - Explained in Plain English
The purpose of this hub is to explain what a triple net lease actually means. If you work in the real estate industry, or are a small business owner who needs to lease space, or just intellectually curious, you may have come across the term, Triple Net Lease, and not truly understood what that meant. There are many different types of leases in the real estate industry, which can make everything confusing. Hopefully, this will clear everything up.
In the simplest form, a triple net lease means that the tenant pays the landlord a base rent plus all of the operating expenses. Let me break it down using an example:
The First Avenue Deli small business owner signs a triple net lease for 1,000 square feet with Landlord, Inc. for $10 per square foot (per year) over a 10 year term. In this case, the $10 per square foot, or $10,000 per year, is the base rent for the leased space. It is commonplace that leases incorporate annual increases to account for inflation, especially with a lease as long as 10 years. Let's say that First Avenue Deli's base rent increases $1 per year. So the deli's base rent will increase from $10 in the first year to $11 in the second year, $12 in the third year and so on.
Now that we've talked about the property revenue, let's talk about expenses. Properties need to be cleaned, lit, renovated and heated/cooled throughout its expected life. Additionally, property owners need to pay real estate taxes and generally pay for property insurance. In short, there are lots of expenses as a landlord. In a triple net lease, the landlord "passes" the expenses to the tenant. Thus, instead of the landlord paying all of the normal operating expenses, the tenant bears the responsibility of paying for them (including any increases over long term leases).
So, back to the First Avenue Deli example. If it costs the landlord $1,000/year for real estate taxes, $500/year for insurance, $500/year for repairs and maintenance, $500 for electricity, $500/year for Heating/Air Conditioning, $500/year for security, and $500/year for cleaning, then the total expenses for the property would be $4,000/year. If the property was empty, the landlord would pay for the expenses themselves. However, after First Avenue Deli signed its triple net lease, the tenant is required to pay for each of these expenses.
That is, during the first year of the lease, First Avenue Deli will pay Landlord, Inc. $10,000 in base rent AND $4,000 in reimbursements. Reimbursements is the real estate industry term for the amount of money a tenant pays for operating expenses in a triple net lease. Now, let's assume that expenses increase 3% in the second year. That would mean that $4,000 would increase to $4,120. Thus, in the second year, First Avenue Deli's rent would be $11,000 in base rent (b/c of the $1 per square foot increase) AND $4,120 in reimbursements. This trend would continue throughout the 10 year term of the lease.
Triple Net Leases can be seen throughout the world and used with any property type. Triple net leases are useful for landlords because they minimize the risk of big increases in expenses since the cost gets passed to their tenants. The triple net lease is most commonly used for leases in the retail sector. Within retail, it is very common to see Single tenant net leases, similar to the First Avenue Deli, because they often occupy stand alone properties.
Now whenever you drive down the street and pass your local pharmacy, fast food restaurant, or bank branch, you can most likely assume that they have triple net leases.