Updated July 10, 2023
Definition of Triple Net Lease
A triple Net lease is a type of lease of property, whether commercial or residential, in which the lease agreement provides the clause that all the expenses like maintenance, insurance, taxes, etc., are to be borne by the lessee apart from lease rentals, and this is generally because of the reason that the lessor wants to minimize the risk and to earn the full benefit of leasing.
Explanation
It is the type of lease where the lessee will bear the expenses, especially maintenance charges of property, property tax, and building insurance. This is because the property requires heavy maintenance charges, and if it is to be borne by the lessor, he has to increase the lease rent. So, instead of increasing the lease rent, the lessor transfers the responsibility of paying maintenance and other charges to the lessee. Furthermore, in large complexes where multiple facilities like swimming, gym, clubhouse, etc., are available, the house’s residents have the choice to avail of the facility and pay high maintenance or don’t avail of the facility and pay low maintenance depending upon the resident. So, in these cases also, the lessor transfers the responsibility of paying the maintenance and other charges to the lessee so that the lessee can avail of the facilities at his convenience.
Characteristics
Some of the Characteristics are provided and discussed below:
- The lessor generally charges lower rent in a triple net lease because the lessee is responsible for paying other charges such as building insurance, maintenance, property, and other real estate taxes.
- In the case of commercial properties, supermarkets, or large complexes, it is more beneficial for all the market shopkeepers to collectively pay the maintenance and other charges, dividing them among themselves.
- In the case of large complexes where besides the lease rent for using the house, the complexes are responsible for providing other facilities like gym, gardens, indoor games, etc., the lessor can conveniently utilize them, making a triple net lease highly advantageous.
- There is more responsibility on the lessee than t lessor; hence, there is a minimum risk for the lessor.
Example of Triple Net Lease
An Ltd gave one of the commercial properties on lease to Mr. Z for monthly lease rent of $ 5,000. The standard lease for the property, as per governmental norms, is $ 5,500. Apart from lease rent, the lessee must pay the property tax approximately. $ 550 every year, maintenance charges as per facilities required every month, which comes to $500 per month, the property insurance, which is $ 400 every year, and every repair and maintenance expense whenever required is the example of the net triple lease agreement as apart from lease rent other maintenance charges are to be paid separately and are to be borne by the lessee apart from monthly lease rentals to the lessor.
Now let’s suppose the lessee paid $ 1,000 as other maintenance charges. But first, calculate the triple net lease amount.
Here for the lessee, the triple net lease rent is lease rent, i.e., $ 60,000 per year ($5,000 * 12) plus property tax which is $ 550 per year plus maintenance charges of $6,000 per year ($500*12), i.e., $500 is paid every month plus insurance charges which is $ 400 every year and other yearly maintenance charges which are $1,000.
Solution:
| Particulars | Calculation | Amount ($) |
| Lease rent | =5,000 * 12 | 60,000.00 |
| Property Tax | 550.00 | |
| Maintenance charges | =500*12 | 6,000.00 |
| Insurance Charges | 400.00 | |
| Yearly other maintenance charges | 1,000.00 | |
| Triple Net Lease | 67,950.00 |
Triple Net Lease vs Net Lease
- In this, the lease rentals, maintenance charges, legal taxes, and building insurance is to be borne by the lessee; hence it is called a triple net lease; as a part of the net lease, the other three maintenance charges are to be borne by the lessee whereas, in case of the net lease other charges like maintenance, insurance, etc. are to be borne by the lessor which is included in lease rent.
- In the triple net lease agreement for a lessee, the lease rent includes lease rent paid to the lessor plus three other charges, maintenance, and taxes, whereas, in the net lease agreement for the lessee, the only lease rent paid to the lessor is the actual lease rent.
- Typically, parties enter into a triple net lease agreement for commercial properties or large complexes while they use a regular net lease agreement for all other properties and equipment.
- It applies only in the case of the property, whereas a normal net lease applies in all other cases, including properties and equipment like machinery, etc.
- For the lessor triple net lease is beneficial, and for the lessee, the triple net lease is expensive. In contrast, in the case of a net lease, the lease is affordable to both the lessor and lessee as the lease rent includes all other maintenance charges.
Advantages
Some of the advantages are provided and discussed below:
- In Triple net lease, lease rent is lower than the standard lease rent.
- In large complexes with multiple amenities, the lessee can conveniently utilize the amenities and pay the corresponding maintenance charges.
- Shopkeepers benefit from commercial properties situated in a supermarket or mall, as they pay a single maintenance, tax, and insurance fee that is then divided among them; this helps lower the charges.
- It can lead to a win-win for both lessor and lessee because of lower rent and payment of other charges by the lessee as per the convenience and requirements of the lessee.
Disadvantages
Some of the disadvantages are provided and discussed below:
- In addition, there can be problems in property maintenance if the property is old and requires high maintenance charges, making it more expensive.
- The cost for the tenant or lessee increases in the triple net lease because of the burden of additional charges.
- Due to inflation, the maintenance charges and property taxes increase daily, creating an unfavorable situation for the lessee.
- It involves a high net cost and more responsibilities on the lessee, which the lessee has to bear under any circumstances.
Conclusion
It is the type of lease that is applicable in the case of the property only and in which the property maintenance cost, property insurance, and the property and other legal taxes are to be borne by the lessor apart from the lease rentals, which increases the burden on the lessee as he has to bear the additional charges and the responsibilities. But the main advantage of a triple net lease is that the lease rent charged by the lessor is lower than the standard rent due to additional responsibilities on the lessee, which can create a win-win situation for both lessor and the lessee.
Recommended Articles
This is a guide to Triple Net Lease. Here we also discuss the definition and example of a triple net lease, its advantages, and disadvantages. You may also have a look at the following articles to learn more –
