Triple Net Expenses: What Are They & What’s Included?

Triple net expenses are a common aspect of commercial real estate leasing, impacting the total cost for businesses renting space. Understanding these expenses is important for prospective tenants, as they represent a portion of financial obligations beyond the stated base rent.

Understanding Triple Net Expenses

Triple net expenses refer to operating costs associated with a commercial property that are typically transferred from the landlord to the tenant. These costs are in addition to the base rent, meaning the tenant pays their proportional share of these property-related expenditures. This arrangement differs from other lease types where the landlord might absorb more operating costs.

The tenant, as the property user, assumes responsibility for many direct operating costs. This structure allows landlords to quote a lower base rent while ensuring ongoing operational expenses are covered. Tenants must budget for these additional payments, which can fluctuate.

The Three Categories of Triple Net Expenses

The term “triple net” refers to three categories of operating expenses passed through to the tenant: property taxes, building insurance, and common area maintenance (CAM). Each contributes to the total occupancy cost and requires consideration by tenants.

Property Taxes

Property taxes are levies imposed by local government entities on real estate based on its assessed value. These taxes fund public services such as schools, infrastructure, and emergency services. Under a triple net lease, tenants are responsible for their proportional share of these taxes.

The assessed value of a commercial property can be re-evaluated periodically, leading to fluctuations in the amount of property tax due. Tenants typically pay their share monthly, often as an estimated amount, with adjustments made at year-end based on the actual tax bill. This means tenants are directly affected by changes in property valuation and local tax rates.

Building Insurance

Building insurance covers the physical structure of the commercial property against various perils, including fire, natural disasters, and other forms of damage. This also includes general liability insurance, which protects against claims arising from injuries or accidents on the property. Under a triple net lease, tenants are responsible for their proportional share of these insurance premiums.

The cost of insurance can vary based on the property’s location, construction type, claim history, and coverage extent. Landlords often maintain a master insurance policy for the entire property, and tenants contribute their pro-rata share. This arrangement ensures the property is protected, with the cost distributed among occupants.

Common Area Maintenance (CAM)

Common Area Maintenance (CAM) charges cover the costs associated with operating, maintaining, and repairing shared spaces and facilities within a commercial property. These areas are used by all tenants and include elements such as parking lots, walkways, lobbies, landscaping, and shared restrooms. CAM expenses ensure these shared amenities remain functional and aesthetically pleasing.

Specific items included in CAM can be extensive and vary between properties. They commonly encompass costs for utilities in common areas, security services, janitorial services for shared spaces, and property management fees. CAM often includes expenses for routine repairs and sometimes capital expenditures, such as roof replacement or parking lot resurfacing. These charges can be the most variable component of triple net expenses.

Triple Net Leases and Financial Responsibility

This lease structure significantly impacts financial responsibility for both landlords and tenants. It provides landlords with a more predictable income stream, as they are largely insulated from fluctuations in property operating costs. For tenants, it means more direct control and transparency into the operating expenses of their leased space. However, tenants bear the risk of increased costs if taxes, insurance premiums, or CAM expenses rise.

Unlike a gross lease, where the landlord covers most operating expenses, or a modified gross lease, which shares some expenses, the triple net lease places the maximum burden for these specific costs on the tenant. Therefore, tenants entering a triple net lease should carefully review the lease agreement’s clauses related to taxes, insurance, and CAM. Understanding which specific expenses are included and how they are calculated is important for financial planning.