A “Triple Net Lease” is a type of lease that every investor should be familiar with, particularly investors who focus on commercial real estate. An investor who owns a commercial building may find him or herself negotiating a triple net lease with a prospective lessee. In fact, an owner should insist on a triple net lease as this type of lease is advantageous to the owner. Alternatively, an investor may be a lessee on a long-term triple net lease for land or a large building. Outlined below is a summary of a triple let lease along with three important things that all investors should know about this type of lease.
What is a Triple Net Lease?
The triple net lease is a type of lease, typically used in commercial buildings, that places responsibility on the tenant for three expenses in addition to the rent. These three additional expenses are the building maintenance, insurance and property taxes. This arrangement is typically preferable for the landlord since the tenant(s) will help defer the expenses of the building. Below are a few important things every investor should know about these types of leases.
1.The Maintenance, Insurance, and Property Taxes Can Change Every Year so the Triple Net Lease Should Account for This.
The taxes, maintenance, and insurance can go up or down each year. Clearly, as the landlord, you are more concerned about being protected if these expenses go up each year. Therefore, it is important, and also customary, to include a provision in the triple net lease that allows you to raise the Additional Rent (which is a common term for the triple net expenses of maintenance, insurance and taxes), which will allow you to raise the expenses that the tenants are responsible. For example, if your annual taxes are increased by the City, such a provision would allow you to raise the Additional Rent to account for the real estate tax increase. However, it is also customary for the Tenant to insist on a cap, or maximum, that such Additional Rent may be increased, so this may be a negotiation point at the outset of the lease. The take away is that all investors that use triple net leases should have a provision in their leases that protects them when the triple net expenses increase.
2.CAM Charges. What Are They? What Should Investors Know?
Common Area Maintenance Charges, or CAM charges, are utilized in triple net leases with multiple tenants. CAM Charges are one of the expenses in the Additional Rent charged to commercial tenants, and are composed of the tenants’ proportionate share of the work and maintenance performed in the common areas of the property. Each tenant is responsible for its pro rata share of the property’s total CAM charges, which is typically equal to the tenant’s rented square footage of the total, rentable square footage of the property.
A common example of a CAM charge is snow removal and salting for a shared parking lot. Since all the tenants and the customers and clients use the shared parking lot, it is a common maintenance expense, and all tenants will share the benefit in having a parking lot free from snow, ice, and other debris, and therefore share proportionately in this cost.
CAM Charges can include different things so it is important to understand them. Typically, CAM charges are defined in the Lease, but may or may not include items such as management service or HVAC repairs. All investors involved in triple net leases should understand that CAM charges may include different functions in addition to the standard snow removal, cleaning, and common area maintenance. As the landlord, it is beneficial to negotiate the management fees and HVAC repairs in CAM charges, if possible. As the tenant, clearly the opposite stance is in your best interest.
Moreover, CAM Charges can change from year to year so, as the Landlord, it is important to have a provision in the Lease that allows you to increase the CAM charges if the expenses increase.
3.Tenants Generally May Review Landlord’s Financials Re Additional Rent
A triple Net Lease is advantageous for a Landlord because it passes most of the maintenance and operating costs to the tenants. However, Landlords should also keep in mind that in most triple net leases, the Tenant has the right to review the Landlord’s financials relating to the taxes, insurance, and maintenance fees to make sure they are accurate and account for any reconciliations. Therefore, all owners of commercial properties with triple net leases with tenants should understand that they may need to allow the tenants to review their books from time to time.