TRIPLE NET LEASE BASICS
A triple net lease, also known as a true net lease, is when the tenant or lessee agrees to pay all the taxes, insurance and common area maintenance expenses that arise from the use of the property, in addition to the basic rental space costs. In a triple net lease the tenant is also responsible for all costs associated with repairs or replacement of structural building elements of the property. It is common for the expenses to increase over time, with a triple net lease.
There are both advantages and disadvantages to triple net leases. First, one advantage of a triple net lease is that the rents tend to be lower, than in other leases. The lower rents makes those types of leases favorable for real estate investors, since all the expenses incurred on the investor are decreased due to the financial responsibility of the property from the investor to the lessee.
Triple net leases can be advantageous to the tenant by providing them with many of the advantages of ownership, including control over the property, without substantial capital investment that a new acquisition requires. Also, a triple net lease can last for at least 50 years, which provides a certain type of security for the tenant.
Triple net leases are typically used for freestanding buildings, such as commercial developments or single-tenant sites.
Triple net leases may have some tax disadvantages for the lesser. If the lessee produces losses, then these could be prohibited for their tax advantage due to the passive loss limitations of the Internal Revenue Code Section 469. Also, significant income from these could cause a C corporation to become a Personal Holding Company or an S corporation to lose their status.
This type of lease can be risky to the investor/lesser. Landlords run into the probability that a tenant may not be able to pay the fees and therefore end up allowing the building to go in disrepair. There have been cases where the tenant was unable to pay for the upkeep of the property and so they decided to damage the property in order to collect the insurance money. This is why it is not uncommon for there to be a reserve fund set up for the tenant to make payments to, in case of an emergency or repairs.
A triple net lease is constructed between the tenant and the lesser, on a case by case basis. There may be certain restrictions or stipulations found within the contract. For example, terms of the lease may include a cap on the total amount on property taxes that the tenant is required to pay. Therefore, if the property taxes rise above a certain amount, then the lesser will be responsible to pay the remainder. There may also be certain caps on the rise of insurance rates and/or the cost of maintenance.
If you are considering a triple net lease, then it is imperative that you make sure that you understand and agree upon all the terms.