Triple Net vs. Gross Lease
What Are The Differences?
One of the most attractive aspects of commercial real estate for investors is the ability to negotiate and structure deals in any way that fits their criteria.
It can also be one of the more frustrating pieces, too, considering how many options you really have when you’re dealing with an investment property or trying to lease vacant space to a new tenant.
Let’s dive into the differences between the triple net and gross leases to determine which one best fits your investment or leasing criteria.
First, What is a Triple Net Lease?
A triple net lease is one of the more common lease structures that you’ll find in commercial real estate.
“Net” stands for the expenses that are passed through directly to the tenant in addition to their base rent. Often called “Additional Rent,” these pass-through expenses include common area maintenance (CAM), property taxes, and building insurance.
These expenses are passed on directly to the tenants on a monthly (most common), quarterly, or annual basis based upon their prorata share of the premises.
Common Area Maintenance
Common area maintenance, often referred to as “CAM,” are all of the expenses incurred of maintaining the common areas of the property, such as shared hallways and bathrooms, parking lots, landscaping, and more.
Property Taxes
Property taxes are taxes levied on the property by the government to help pay for the infrastructure that serves and supports that site. These taxes are separate from any sales or excise taxes that the tenants may pay due to the nature of their business.
Building Insurance
This insurance is carried by the landlord to care for any issues that may arise within or on the premises. Landlords will often have this policy in their name and will be reimbursed by the tenants to ensure that the bills are being paid.
How Triple Net Leases are Quoted
Triple net leases may be quoted as “$20 per square foot NNN with $5 per square foot in pass-throughs.” Those pass-throughs will be the NNN expenses, so in this scenario a tenant would pay $25 per square foot all-in (unless the NNNs shift) plus their utilities.
So, What is a Gross Lease?
Gross leases are the counterpart to triple net leases and are essentially a simplified version of the lease structure.
While the NNN expenses don’t go away, the rent is quoted as an all-in rate, so the tenant will pay one lump sum of rent and the landlord will handle the common area maintenance, property taxes, and building insurance.
Both tenants and landlords like this lease structure due to the simplicity of the offering - it’s very easy for both tenants and landlords to understand exactly how the lease will be structured and how payments will be made.
If the lease is full-service gross, it will include any and all expenses on the property, such as the triple nets and utilities. If the lease is modified gross, it may be “net” of utilities, meaning the rent includes every expense except for the utilities.
How Gross Leases Are Quoted
A full-service gross lease may be quoted as “$25 per square foot, full-service.”
If the lease is modified gross, it may be “$25 per square foot, modified gross, with the tenant paying utilities.”
How Are They Different?
So, as you saw in the examples above, triple net leases and full-service leases can actually cost the same amount to a tenant, but there are reasons a landlord may choose to use one structure over another.
Triple net leases protect both the landlord and tenant in different ways. Landlords are protected if the costs associated with operating the property (the NNNs) increase because those expenses are passed directly on to the tenants that benefit from utilizing the site. Tenants also have the ability to audit the common area maintenance expenses to ensure that the common areas are not only maintained properly, but aren’t breaking the budget.
Gross leases have their pros and cons for both landlords and tenants, as well. Landlords have a more easily understood offering, since tenants can often get confused by the whole “base rent, additional rent” side of triple net leases. All the landlords have to quote is a single rate, which makes it fairly straightforward for tenants to understand. However, tenants don’t have the ability to audit any of the CAM expenses, meaning a landlord could cut corners in order to increase profits.
Both leases can be good for any number of leasing scenarios, depending on the sophistication of the landlord and tenant, type of property, and investment strategy. It’s best to work with your attorney and CPA to determine which structure works best for you and your team.
About The Author:
Tyler Cauble, Founder & President of The Cauble Group, is a commercial real estate broker and investor based in East Nashville. He’s the best selling author of Open for Business: The Insider’s Guide to Leasing Commercial Real Estate and has focused his career on serving commercial real estate investors as a board member for the Real Estate Investors of Nashville.
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