Do you know the difference?
A triple net lease makes tenants pay for the expenses of the building separately while a gross lease gives the landlord responsibility for a building’s operating expenses. While the distinction between the two might seem vast, the two lease types are frequently more similar to each other than they may seem.
The Gross Lease
In a gross lease, sometimes also referred to as a full service lease, tenants pay a single set rent amount. Out of that rent, the landlord pays all of the building’s expenses, including property taxes, insurance, and the costs of keeping the building maintained and operating. In office buildings, it’s common for the landlord to pay for electricity and janitorial service as a part of a full service lease.
The key benefit to tenants is that they get a single price for their entire occupancy cost, transferring all of the risk of increased operating expenses to landlords. Landlords don’t like this. In fact, one way to remember what a gross lease is to think of it as being “gross” for the landlord.
In response to this problem, landlords frequently modify gross leases by adding expense stops. An expense stop is a provision that caps the amount of operating expenses that he has to pay. If an industrial space in St. Louis has an $8 per square foot expense stop and the operating expenses are $7.50, they’re included in the gross lease. If expenses go up to $9.25, though, the tenant has to pay an extra $1.25 for the amount over the stop.
The Triple Net Lease
A triple net lease has two components. First, tenants pay a base rent that covers the right to occupy the building. Second, they pay their share of all the building’s operating expenses. Technically, the three nets in a triple net lease are taxes, insurance and maintenance, and the triple net charges that get passed through to tenants are frequently called common area maintenance, or CAM, charges.
Landlords love triple net leases because they leave tenants responsible for the cost of running the building, limiting the landlord’s risk. Tenants of industrial space in St. Louis put up with them because they have become common in many parts of the country.
The economics between the two types of leases aren’t as different as they might seem. Typically, the base rent in a triple net lease is much lower than the base rent of a gross lease, and the variance between the two is usually roughly equal to the amount of the CAMs. Ultimately, a $15 net lease with $9 in CAMs costs the same as a $24 gross lease. When landlords add expense stops to a gross lease, they can increase just like a triple net lease, as well. The hidden secret of the two, though, is that while gross leases don’t go below their base rent, triple net CAM charges freely fluctuate up and down. This lets tenants on triple net leases pocket the savings from running their spaces efficiently.