If you have a passing familiarity with the field of finance, you may have heard of a triple net lease. If you have slightly more familiarity, you may simply be aware that a triple net lease is complicated. But that doesn’t mean that it’s inscrutable.
While triple net leases have more limited versatility than single or double net leases, they do come with some distinct advantages and can sometimes provide the ideal symbiotic relationship between both leaser and lessee.
Triple Net Lease: An Explanation
While it may sound like complicated finance jargon, the fundamentals behind a triple net lease are actually not that hard to understand. A traditional single net lease is one of the most common choices in residential real estate, but it appears pretty commonly in commercial real estate as well. With a single net lease, the landlord is responsible for everything beyond rent – including utilities, repairs, and maintenance. That provides the renter with fewer unknown costs to deal with, but rent tends to be higher as a result.
Double net leases are arguably the most common form of a lease in commercial real estate, and they find a greater balance between the responsibilities of the landlord and the tenant. In a double net lease, the tenant will pay insurance premiums and property taxes in addition to a rent designated by the landlord.
The triple net lease shifts even more of that responsibility onto the tenant. In addition to paying standard rent and juggling the responsibilities of property taxes and insurance premiums, a tenant under a triple net lease will also deal with repairs and maintenance to the structure of the building. Effectively, the tenant takes almost all of the liabilities for the building – and in return, they pay significantly less rent.
When a Triple Net Lease is Practical
Taking on more responsibility isn’t always a good thing – and that’s especially true of fresh entrepreneurs who already have a lot on their plate. For the tenant, a triple net lease brings a whole lot more variables to the equation. While the base rent will be lower, it can be dramatically upset by sudden and unexpected expenses. It’s a higher risk and higher reward scenario, and it doesn’t offer the stability that comes from a more standard lease.
The advantages to the landlord are even more obvious. While they may have less money coming in, a triple net lease turns a property into very low impact investment. The money will continue to come in without the risk of unneeded expenses digging into your savings. As far as real estate is concerned, having a commercial client with a triple net lease is one of the safest investments you can make.
Making the Most of a Triple Net Lease
If you’re a renter tied to – or considering getting tied to – a triple net lease, you need to recognize that you’re in a position of leverage. From the perspective of the landlord, a triple net lease is one of the most stable forms of residual income around. That means that having a stable tenant is going to be more valuable than receiving a larger share of rent money from tenants. That opens up the opportunity to trim down on that core rent cost even more in negotiations.
For a landlord, it’s important to be patient under the terms of a triple net lease. While the amount of money received on a monthly basis may feel relatively modest, it’s important to recognize the lack of risk involved in these sorts of relationships. Keeping a tenant for years or decades is a money guarantee that doesn’t come with the added risk of natural disasters and acts of god.