A triple net lease is a specific form of commercial lease agreement in which the tenant is required to pay rent, as well as contribute to the payment of the landlord’s operating expenses, such as building insurance, taxes, repairs, maintenance, and utilities.
Triple net leases are often perceived as advantageous to landlords due to the obvious benefit of reducing their responsibilities related to the maintenance and upkeep of the building. Triple net leases allow landlords to collect rental income while transferring the burden of repairing, maintaining and improving the premises to their tenants. Sometimes, this will backfire on a landlord when the tenant does not have the financial means to keep up with the operating expenses or allows the repairs and maintenance on the property to go unattended to.
Although it would appear as if there’s no reason for a tenant to enter into a triple net lease, there are a few benefits which a tenant can take advantage. Triple net leases often have fixed rental rates which are lower that those of traditional leases. This can be particularly beneficial to tenants occupying newer buildings requiring little or no maintenance and that make efficient use of utilities.
The following demonstrates how a triple net lease works:
Bill owns and operates a commercial cleaning company out of a warehouse. Bill enters into a triple net lease with his landlord to rent the 3,000 square feet warehouse at a rate of $10 per square foot each year for 10 years. Bill’s base rent for the warehouse will therefore be $30,000 per year.
The landlord includes a provision in the lease that increases Bill’s base rent by $1 per square foot every year during the term of the lease. The triple net provision of the lease states that Bill is required to pay 25% of the landlord’s operating expenses for warehouse which includes taxes, insurance, maintenance, repairs, and utilities.
In the first year of the lease, the operating expense are as follows:
$5,000 for real estate taxes.
$2,000 for insurance
$1,000 for repairs and maintenance.
$2,000 for electricity and $4,000 for heat/air conditioning.
Based on these numbers, Bill would pay a total of $33,500 ($30,000 in rent and $3,350 for 25% of the operating expenses. This is not really a problem for Bill as long as he knows approximately what the operating expenses are and what he will have to pay each year.
Consider, however, that, in year two, the warehouse floods and it costs $20,000 to renovate the building. Bill would now have to pay an additional $5,000 (25% of the repair) on top of the base rent and 25% of remaining operating expenses for the year.
As this blog has discussed before, the negotiation and preparation of a commercial lease in can be remarkably complex, therefore, it is advisable to consult with an experienced real estate attorney before and during the negotiation process. If you have questions about commercial leasing in Illinois, contact the experienced real estate attorneys at The Slater Firm, Ltd. today.