In an article published by Development magazine, Bass, Berry & Sims attorney Richard Spore provided insight on the benefits and risks associated with real estate projects in which landlords operate on a triple net lease model. While the gross rent model requires a landlord to pay 100 percent of operating expenses, the triple net lease model requires tenants to pay all operating expenses either directly or through reimbursement to the landlord. Building operators must rely on a multitude of factors in determining which lease structure works best for their particular situation, and those factors largely boil down to how to allocate certain economic risks between the landlord and tenant. Under the gross rent model, landlords bear the risk that actual operating expenses may exceed projections, but tenants risk overpaying the landlord if the actual operating expenses are lower than projected.
“That risk can be reduced or eliminated with the triple net model, under which all operating expenses are shifted to tenants, although those expenses are sometimes subject to negotiated limitations,” Richard said. Of course, there are risks to both parties under a triple net lease, such as balancing expenses and liability between the landlord and tenant(s) as it relates to building operation and repairs.
The full article, “The Benefits and Risks of Triple Net Leases,” was published in the Summer 2017 issue of Development magazine, the official NAIOP.