Triple Net Lease Example: How the Rent Adds Up

Every figure in this guide is hypothetical, for illustration. None of it is market data, and it should not be used to judge whether a real rent is high or low. The aim is to show the mechanics, so that you can run the same arithmetic on an actual proposal.

• Your suite: 5,000 rentable square feet.
• The building: 50,000 rentable square feet, all tenants billed on the same basis.
• The quote: $20.00 NNN, meaning base rent of $20.00 per rentable square foot per year, with taxes, insurance and maintenance on top.
• Landlord’s estimate for the building this year: taxes of $200,000, insurance of $25,000 and common area maintenance of $175,000.

1. Work out your share. 5,000 divided by 50,000 is 10 percent.
2. Work out base rent. 5,000 square feet times $20.00 is $100,000 a year, or $8,333.33 a month.
3. Work out taxes. 10 percent of $200,000 is $20,000 a year, which is $4.00 per square foot.
4. Work out insurance. 10 percent of $25,000 is $2,500 a year, which is $0.50 per square foot.
5. Work out CAM. 10 percent of $175,000 is $17,500 a year, which is $3.50 per square foot.
6. Add the nets. $20,000 plus $2,500 plus $17,500 is $40,000 a year, or $8.00 per square foot, which is $3,333.33 a month.
7. Add base rent and the nets. $100,000 plus $40,000 is $140,000 a year, or $28.00 per square foot, which is $11,666.67 a month.

This is the number many tenants stop at, and it is still not the full cost. A triple net lease generally leaves your own suite costs to you. Suppose electricity for the suite runs $1.50 per square foot and janitorial service $1.00. That adds $7,500 and $5,000.

• Base rent: $100,000 ($20.00 per square foot).
• Taxes, insurance and CAM: $40,000 ($8.00).
• Suite electricity: $7,500 ($1.50).
• Janitorial: $5,000 ($1.00).
• Year-one total: $152,500 ($30.50), or $12,708.33 a month.

The quote said $20.00. The hypothetical all-in cost is $30.50. Comparing a $20.00 net quote with a $30.50 gross quote as if they were the same kind of number would produce the wrong answer.

The $8.00 above is the landlord’s estimate. In most net leases you pay the estimate monthly, and the landlord compares it with actual costs after the year ends.

Suppose actual taxes, insurance and CAM come in at $8.60 per square foot. You paid $8.00, so you owe the difference of $0.60 on 5,000 square feet, which is $3,000. If actual costs had been $7.60, you would receive a $2,000 credit instead. The landlord will then usually reset the monthly estimate for the new year.

Build this into the budget as a real possibility. A true-up bill arrives after the year it relates to, and a low first-year estimate may simply mean the bill comes later.

Now suppose the landlord offers the same suite on a full-service gross basis at $30.50. In a full-service lease, the rent is intended to bundle operating costs, so you write one check.

• Rent: 5,000 square feet times $30.50 is $152,500 a year.
• Monthly payment: $12,708.33.
• Separate bills for taxes, insurance, CAM, electricity and cleaning in year one: none, assuming the lease really does include them all.

In year one the total is identical, by design. That shows why the comparison cannot end with the rent. It has to continue into what happens when costs change.

Suppose taxes, insurance and CAM rise from $8.00 to $8.80 in year two, an increase of $0.80 per square foot, or $4,000 on your suite. Ignore base rent escalations and suite costs for the moment. The three common structures treat that $4,000 differently.

• Triple net: you pay all of it, because your payment follows actual costs. Your nets rise to $44,000.
• Pure gross, with no adjustment: the landlord absorbs it during the term, and your rent stays where the lease set it.
• Gross with a base year: you pay your share of the increase above the base year. If the base year was year one and its actual costs were $8.00, you owe the same $4,000.

The third line surprises people. Many gross office leases carry a base year, and in that case the exposure to future increases can look much like a net lease. What the structure changes is who carries the starting level of costs and how it is built into the rent. A lease with a stated expense stop works differently again, and our base year guide walks through it.

A hypothetical of this kind cannot tell you which structure is better for you. The answer depends on the actual rents offered, the building’s cost history, what is capped and what is excluded.

To apply this to a real deal, collect the inputs in writing. A landlord’s proposal rarely includes all of them unless you ask.

• ✓What are the rentable square feet of our suite and of the building, and how was each measured?
• ✓What are the current estimates for taxes, insurance and CAM, per rentable square foot?
• ✓What were the actual figures over the last several years?
• ✓Who pays for suite electricity and in-suite cleaning, and how are they billed?
• ✓What are the scheduled base rent escalations?
• ✓Is free rent or a tenant improvement allowance included, and does it apply to the nets?
• ✓Are any costs capped, and which ones are excluded?

Then project each option across the full term using the lease’s escalations and a stated assumption for cost growth, and compare the totals. When we compare proposals for a client at Tenant Advisory Group, we restate net and gross options on the same basis this way, so that the rent line does not decide the question on its own. Have your CPA or attorney confirm how your lease defines each charge, since the definitions, not the labels, set what is billed.