Make It a Triple (or Not)

2005-09-12 - San Francisco, CA 007

When signing a commercial lease, it is very important to know what is included as part of the rent payment and what additional payments may be due.  Often tenants go into a lease negotiation with a belief that as long as they are paying their base rent, everything is covered.  However, that may not be the case.

One common type of lease that can put a big ding in a tenant’s budget is called a triple-net lease.  The triple net lease is used extensively in commercial real estate. The tenant is responsible for all of the costs relating to the premises being leased in addition to the rent fee applied under the lease such as net real estate taxes, net building insurance and net common area maintenance.   So if the tenant leases twenty-five percent (25%) of a particular building, the tenant will be responsible for paying five percent (25%) of the real estate taxes, insurance and common area maintenance of that building.  This is on top of the rent payment.

This is in contrast to a gross lease in which the tenant plays a set amount for rent, and the landlord uses that amount to cover expenses as related to the business or on whatever else the landlord wants to spend it.  There are, of course, lots of versions of leases that fall somewhere in between the extremes of a triple-net and a gross lease.

Given the additional expenses to tenant, the triple net lease typically has a lower base rent amount than it would in a gross lease.  As the landlord shucks off more payments onto the tenant, the lower the base rent should be.  Whereas the more payments and responsibilities the landlord retains, the higher the base rent will be.

Each landlord may take its own approach and add or take away responsibilities for a tenant.  For example, the landlord may choose to have a specific tenant take responsibility for the condition of the parking lot, make the tenant pay a percentage, or the tenant be free from paying anything related to the parking lot as long as the tenant does not damage it.  In addition, there may be requirements for tenant paying part of landlord’s insurance, have its own tenant insurance, and name landlord as co-insured or beneficiary.

In other words, I have yet to meet a tenant who actually wants to read the potentially 20-30 pages of lease, but it is very important to do so because the base rent amounts is usually a very small part of the lease obligations.