In commercial real estate, a triple-net lease allows landlords to pass the risk of paying for utilities, insurance, and taxes to their tenants. In addition their rent, tenants take on these additional costs each month.
Ten years ago, most leases were full-service gross leases, where rent and operating expenses were all rolled into one monthly fee. Landlords had to guess what the annual cost of operating expenses would be. If they guessed too low, they would be the ones to pay the cost.
Then, modified gross leases came about, where tenants paid their rent, plus an additional standard operating cost each month, to cover utilities. This method is less risky for the landlord, but does not give the tenants any incentive to consume less energy, since the operating cost does not change month to month.
Now, the industry is moving toward triple-net leasing structures, where tenants pay their rent, plus the operating expenses based on the previous month’s cost and the size of their space. In the case of triple-net leases, landlords are able to push all of the risk off to the tenants, and it is the tenants’ responsibility to reduce their energy consumption if they want to change their utility bills each month.
Two Types of Triple Net Leases
When it comes to utilities, triple-net leases can be structured by dividing the building up by square foot and having each tenant pay based on how much space they rent, or the spaces can be submetered, in which case tenants only pay for what they specifically consume.
1. Triple Net by Square Foot
A tenant with this type of lease still does not have much control over their monthly operating expenses. There is no way for them to tell how their specific consumption is affecting the total consumption of the building. Plus, no matter how hard they work to turn off their lights and unplug appliances for the weekend, their expenses will not be significantly lowered if their neighbors are not taking the same actions.
2. Triple Net by Submetering
Another way to separate space is by using submeters for each tenant. Typically, this type of leasing structure will be put in place in a new building, or if a new tenant requests for a submeter to be put in place for them.
Submeters allow bills to be split equitably, so tenants only pay for exactly what they consume. Then, if they engage in sustainable practices they will actually see the impact on their bills every month. This method has a positive impact on tenant satisfaction and motivates tenants to be energy conscious.
However, switching to submetering can be challenging. If you want to learn more about the best ways to implement Triple Net Leasing with our without submetering, join our webinar on April 8th!