A triple-net lease is a rental agreement where the tenant agrees to pay expenses in addition to the monthly rent. If you are the tenant with a triple-net lease, you have to pay for property taxes, insurance, and maintenance on the building. If you’re wondering why a tenant would agree to such an arrangement, read on.

Owners of commercial buildings and investors place a high value on a steady income stream. Landlords price commercial rents as a price per square foot, and the price tends to be pretty stable throughout a market. Property taxes, insurance, and maintenance costs reduce revenue and are always variable, since the city may raise taxes, insurance companies may raise rates, or the building may need major repairs suddenly. So landlords try to pass these costs onto tenants willing to shoulder them. In return, they usually lower the price per square foot that they charge for rent.

Now imagine you are a commercial tenant and are looking for a building to rent. You are willing to assume some additional costs to get a lower rate per square foot. You have to buy some property insurance anyway, and perhaps you can add building coverage at a low cost. The building may be brand new, so you don’t anticipate any major maintenance costs, or you may have gotten a tax incentive from the city for opening a business there.

In this situation, a triple-net lease makes sense. The landlord eliminates the variable costs and gets a steady revenue stream, and you get a lower cost per square foot rent. Things don’t always work out this nicely, and there are risks for you and the owner with a triple-net lease. Suppose you stop paying property taxes or insurance or ignore minor maintenance that turns into a big issue. Or the city reassesses the building that results in a huge property tax increase and the landlord doesn’t want to contest it or pay for a reappraisal. You might end up declaring bankruptcy, leaving the landlord with an empty building. Because of these risks, it is important that each party check out the other thoroughly before signing any binding documents.