As a commercial asset manager, one of the most common questions I get from real estate investors is how to negotiate the best triple net lease. This type of arrangement, where tenants pay their share of property taxes, insurance, and common area maintenance costs, can be lucrative if structured properly. However, it’s important to understand the nuances to ensure favorable lease terms. In this guide, I’ll share key considerations and proven strategies to master the triple net lease.
+ Expense Recovery Items to Focus On
A triple net lease transfers certain operating expenses to the tenant, which the landlord can recover. Be sure to pay close attention to the following cost recovery items during lease negotiations:
CAM (Common Area Maintenance) – Negotiate a broad CAM definition allowing maximum pass-through of maintenance and repair costs for common spaces. It is easy to get caught up by allowing changes to the lease by the tenant in an effort to ‘get the deal done’, but weigh the changes and their potential costs carefully! They can have very long term consequences and cause slippage by way of unrecoverable expenses throughout the life of the lease. If the property is a new purchase and you do not have a solid history of verifiable expenses from third party vendors and you are writing or amending leases, refrain from agreeing to caps on expenses until after the first year.
Taxes – Specify tenant responsibility for all property taxes and avoid caps on tax expense pass-through. Refrain from using the terms ‘increase’ or ‘base year’. You want the language to be clear that the tenant pays their prorata share of the full real estate tax amount billed by the municipality.
Insurance – Require tenant to carry building insurance and name landlord, and landlords managing agent, as additional insured. Pass through any insurance premiums paid by landlord.
Utilities – Consider separate metering and make tenant responsible for all utility costs. If submetering utilities, ensure that the lease is clear about how and when the charges will be passed through. It should also be crystal clear about how the charges will be calculated.
Capital Expenditures – Clearly define tenant and landlord responsibility for capital improvements and repairs. Capital improvements will generally not be passed through unless the lease clearly states it’s allowed.
Administrative Fees – Allow for reasonable fees to cover your time spent administering CAM and tenant billingsand to ensure you can cover a management fee if you choose to engage a property manager.
It's best to never allow a cap on taxes, insurance, utilities, or snow.
+ Key Lease Terms to Negotiate
Beyond expense recoveries, focus on these key economic terms during lease negotiations:
Length of Lease Term – Shoot for at least 5-10 years to reduce turnover costs. Offer tenant incentives for longer lease terms.
Rent Increases – Include graduated bumps like 3-5% annually or CPI escalations to offset rising costs.
Tenant Improvement Allowance – Offer a mutually agreeable TIA for build outs and ensure that lease states that it is not paid until receipt of paid invoices, lien waivers, a certificate of occupancy, certificate of insurance, security deposit (if applicable) and first months rent are received.
Extension Options – Provide tenant options to renew to avoid large turnover costs down the road. Ensure that the lease requires at least 180 days notice of intent to renew. This will provide adequate time to market the space if the tenant chooses to vacate at the end of their term.
+ Areas to Remain Flexible
While favorable expense recovery and economic terms are ideal, remain open in these areas to keep negotiations moving:
Exclusivity – Allowing certain exclusive uses can attract tenants to fill vacant space.
Signage – Branded signage can be a big perk for tenants. Relax signage restrictions if possible.
Cap HVAC – ONLY if the HVAC unit is relatively new and has been routinely maintained should you place a cap on HVAC expenses. This can sweeten the deal for a prospective tenant who might be nervous about the potential expense of a roof top or other commercial HVAC unit. Capping the expense at $1,500 per year out of pocket makes the tenant responsible for most repairs but provide a safety net should the unit require a major repair.
Move-in Grace Period – Provide 1-2 months of free rent after build out completion to help the tenant to have a smooth and successful opening.
With a balanced approach, investors can secure fair triple net leases that generate stable passive income. Just focus on maximizing cost recovery potential without being overly rigid on flexible perks. Mastering this process takes experience, but hopefully these tips will set you on the path to successful triple net lease negotiations.
+ Helpful Lease Clauses
Topic | Possible Lease Clauses |
Prorata Share Calculation | Tenant's Share of the Cost of (the maintenance and operation of the Common Area / Tax / Insurance) shall be determined by the following formula: The number of square feet of agreed floor area in the Demised Premises (____square feet) shall be multiplied by the fraction, the numerator of which shall be the total cost of the maintenance and operation of the Common Area, and the denominator of which shall be the sum of the agreed total leasable building area in the Shopping Center (______ square feet). |
CAM Inclusions | The cost of the maintenance and operation of the Common Area shall mean the total costs and expenses incurred in operating and maintaining the Common Area, including, without limitation, compensation to a management company; Christmas or other seasonal decorations; gardening, lawn mowing and landscaping; sign maintenance; insurance expenses; taxes; replacement, repairs and maintenance of all parts of the Common Area, including re-striping; sweeping and repaving of the parking area; electrical for the common area including lighting, signage, etc.; rental of signs and equipment; sanitary control; removal of snow and ice; and all other similar direct costs, charges and expenses resulting from the maintenance and operation of the Common Area. The expenses itemized in this subparagraph are not intended to duplicate expenses set forth in other paragraphs of this Lease, and Landlord shall only be entitled to a single reimbursement for Tenant’s share thereof. |
Utility Considerations | Unless otherwise part of Common Area Maintenance, Tenant shall be responsible for all utilities, including but not limited to, heat, gas, electricity, water, sewer and stormwater, all trash removal charges, phone, cable, internet, cleaning of demised premises, grease trap cleaning and maintenance, and all other service or utility not provided by the Landlord. |
Preventative Maintenance w/CAP | All electrical and plumbing systems and fixtures, heating and air conditioning systems shall be maintained by the Tenant. Tenant shall provide Landlord with a copy of the service agreement for preventative maintenance of the HVAC equipment no less than once quarterly. The first $1,500 for HVAC repairs shall be paid entirely by Tenant. Notwithstanding the foregoing, if repairs are attributed to lack of preventative and routine maintenance, Tenant shall be responsible for the full cost of repairs, up to and including replacement. |
CAM Reconciliation Language | Tenant's Common Area maintenance contribution shall be due and paid with rent on the first of each month. For the initial calendar year, the common area maintenance shall be estimated at $____per square foot. Within one hundred eighty (180) days following the end of each calendar year, Landlord will deliver to Tenant an itemized breakdown of the Common Area maintenance charges signed by Landlord or a duly authorized agent of Landlord. If the Common Area maintenance contribution is less than the actual charges, then Landlord shall invoice the Tenant, the difference. Tenant shall pay the invoice within 30 days of receipt. If the Common Area maintenance contribution is greater than the actual charges, Landlord shall apply a credit to Tenant’s Common Area maintenance charges for the following month(s) rent until credit is exhausted. |
Tenant Maintenance Responsibility | Tenant shall at all times maintain the Demised Premises (including the inside and outside of all exterior entrances, store front and the glass and moldings in the doors and windows) and all partitions, doors, fixtures, equipment and appurtenances thereof, in good order, condition and repair and including reasonable periodic painting, making proper replacements when necessary, all at its own expense, except for structural portions of the roof, foundation, exterior walls, structural floors, ceiling supports, all outside electrical service to the building and the outside portion of the water and sewer lines, which shall be maintained by Landlord; but, if Landlord is required to make repairs by reason of Tenant's willful or negligent acts or omissions to act, the cost of such repairs shall be paid by Tenant and shall thereafter become due as additional rent. |
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Disclaimer: Author is not an attorney and this article does not constitute legal advice. The information provided is for general informational purposes only. If you have a specific legal issue, you should consult with a licensed attorney in your jurisdiction who can provide advice based on the particular facts and circumstances of your situation. This article is not intended to be a substitute for the advice of an attorney.