What Is a Triple Net Lease?

Triple net lease is a type of commercial lease where the tenant pays taxes, insurance and maintenance costs in addition to rent. This type of lease has advantages from both the landlord and the tenant. The tenant gets flexibility to make changes and improvements to the property without having to consult the landlord. The landlord is able to save money and time that would otherwise be spent taking care of the tenants' problems. As the result, triple net leases tend to be popular with tenants and landlords alike. However, they do have some downsides that tenants should be aware of before they sign a triple net lease.

Understanding Commercial Leasing

When a person rents a residential building, he he or she essentially purchases a right to live in a portion of the building for a certain period of time. The landlord owns the actual building, so he or she is responsible for it's upkeep and maintenance.

With commercial properties, things are a bit more complicated. They bring in more profit than their residential counterparts, but because of the sheer size and complexity, they tend to be more expensive to maintain. At the same time, the tenants of the commercial properties need to be able to alter the building to suit the needs and demands of their businesses. The property taxes are also more expensive. So, while the commercial properties generate large profits, they also result in larger expenses for the landlords.

This led to the development of three different types of commercial leases; gross lease, double net lease and triple net lease. The gross lease works the same way as lease on a residential apartment building. The double lease splits the maintenance and upkeep costs between the landlord and the tenant. The triple lease requires the tenant to cover property taxes, property insurance costs and maintenance costs out of his or her own pocket. The landlord gets to collect rent and, since he or she doesn't need to pay the costs landlords are usually required to cover, he or she gets to keep most of the money.

Advantages of the Triple Net Lease

Because they are responsible for covering insurance and maintenance costs, they are able to choose which insurance company to buy insurance from and which contractors to hire. As the result, they can get better services for their money. It also allows them to hire contractors whose experience makes them best suitable for the needs of their businesses. Because the landlord isn't responsible for maintenance and upkeep, the tenants can make any upgrades and improvements they want whenever they want. And, since they don't have to wait for the landlord to call the contractors, they can address any utilities and infrastructure problems faster, making it easier for them to return to normal operations. And while property taxes do impose an additional financial burden of the tenants, they may be able to qualify for tax breaks that they otherwise wouldn't be eligible for.

Disadvantages of the Triple Net Lease

The biggest issue with triple net leases is that they saddle tenants with expenses they wouldn't otherwise need to cover. This may not be much of an issue when the business is booming, but when the profits fall short of projection or, worse, the business suffers losses, the tenant could face trouble making payments. If this continues, the tenant may be left in an uninsured building with utility issues that were allowed to go unaddressed. In the worst case scenario, the tenant may abandon the property altogether. The lender would get stuck with the property that nobody would rent, and he or she would be forced to spend thousands of dollars to make the property rentable again.

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