Triple Net Lease Form- Why Would You Sign One?

A “net” is an expense related to the lease. A “triple net” lease will refer to the three “nets” of commercial real estate leasing- real estate taxes, property insurance, and common area maintenance, or CAM (sometimes referred to as OpEx, or operating expenses). The triple net lease form is not a completely hands-off experience for Landlord, and it’s not owning the property in all but name for Tenant, either. Both parties must negotiate the triple net lease form carefully to set expectations, and downloading and signing a triple net lease form that isn’t tailored to your situation can create disastrous results.

Attraction of a Triple Net Lease Form

The triple net lease form (or NNN lease form) is attractive to Landlord- it’s guaranteed rental income while Tenant pays the NNN expenses.  It’s attractive to Tenant, too- a long-term lease, lower rent and flexibility with the building, since there’s no capital investment to purchase the land.

It Can Get a Little Tricky

A triple net lease is easier if there is a single tenant occupying an entire building.  If Landlord has multiple tenants and shared facilities or common areas, then the accounting and applicability gets more involved.  Tenant should contribute Tenant’s Proportionate Share of the NNN expenses to Landlord, and Landlord is responsible for using that money to make the payments for the insurance, tax, and operating expenses. Tenant’s Proportionate Share is based on how much space is occupied in relation to the property as a whole.

When you’re negotiating your triple net lease form (or, rather, you’re working with your professional team to protect your interests and mitigate your risk), focus on these three triple net expenses and how each party will approach them in negotiations:

Insurance

Tenant pays for all or a portion of the insurance cost on Landlord’s property. Negotiate this section carefully:

  • Coverage should be adequate
  • Insurance company should be properly qualified, not just the lease expensive
  • Make sure Landlord is informed of coverage changes/lapses
  • Tenant should have to report/file a claim with a claimworthy event occurs

If Tenant doesn’t meet the insurance requirements, Landlord can default Tenant under the lease, but meanwhile, and pursue remedies that way, but meanwhile, there’s damage and no money to fix it. Also, if Tenant violates the insurance (like arson), then there’s no coverage, even if Landlord is listed as additional insured.

CAM/OpEx

This section should be highly negotiated in your triple net lease form, especially if this is a multi-tenant location.  Be very specific about what expenses are included, and excluded, from CAM or OpEx. Negotiation tip: watch for capital expenditures, insurance charges as part of CAM if already paid as a separate charge, and maintenance contract requirements.

Landlord should be very clear on the maintenance requirements and quality of work that Tenant is responsible during the Lease term.

Taxes

Who can protest the tax bill?  If no one protests it, and taxes increase more than those of comparable properties, Tenant is stuck with a higher bill, and Landlord may have difficulty finding a new tenant at the end of the lease term.

A triple net lease form involves a lot of negotiation and understanding the long-term consequence of those negotiations. Getting a form online won’t provided the customized solution necessary in this complex Landlord-Tenant relationship.  It’s important to have an experienced team in place to guide you through the process of negotiating a triple net lease form.


Disclaimer:

This article does not create an attorney-client relationship. This article is for general education purposes only and is not legal advice. You should consult with a qualified attorney before you rely on this information.

One of the advantages of leasing is to have someone else fix the problems, right? Tenant pays rent, Landlord fixes things. That’s what an idea commercial real estate lease contain from a Tenant viewpoint, right?

Welcome back to the real world.

First, some definitions:

Repairs and maintenance: A repair is to fix something broken (air conditioning that isn’t working) and maintenance is to keep something in working condition (changing the air filter in the air conditioning). These are expected, routine expenses that can be accounted for in CAM (common area maintenance, check out my CAM post for more information).

Replacement: A thing can’t be fixed, so a new one has to be acquired and put into use, and the old, broken one disposed of. Replacements are usually expected, but unpredictable in nature (you can’t always be sure when the hot water tank will need replaced). The really expensive items that need replaced are sometimes capital expenditures.

Capital expenditure: A financial term and it has to do with taxes and depreciation. A capital maintenance item could be a repair or replacement. It might be covered through CAM, or there could be a special assessment. A capital improvement is changing out what is already there for something else to make the situation better. It’s big, it’s expensive, and it is something where Landlord generally reaps longer-term benefits.

HVAC: Heating, ventilation and air-conditioning. When included as part of plumbing, electrical, sprinkler, life-safety, etc., these are known all together as systems.

What To Negotiate:

– Tenant should repair/replace/maintain what it brings onto the property. Tenant should contribute its proportionate share of common area maintenance through CAM payments.

– Tenant is still responsible for maintaining the stuff inside its space. This means things like filter checks and replacements, maintenance contracts, pest control, etc. Tenant probably doesn’t get the tax benefits of a replacement (like depreciation), so is a good place to read closely and negotiate.

– A system could exclusively service Tenant, such as a dedicated plumbing or HVAC system. If Tenant is the only one that is using it, make sure it is in good condition, because Tenant should be responsible for maintaining it.

– Find out how old the HVAC system is! Find out if it is still under warranty! Find out if it has been regularly services and maintained! Ask questions and get documentation! Otherwise, Tenant might end up with an unexpected expense, or worse, in default if the repair isn’t made and Landlord does it instead.

– Landlord should generally maintain, repair and replace systems that service the common areas or that are not exclusive to one tenant, the structural portion of the building, the foundation and the roof, as well as the common areas of the building. These are shared, and are part of CAM. Watch out for replacement expenses sneaked in there. Negotiation tip: A CAM cap can limit the increases in some of the expenses!

Of course, if there is a casualty or someone is negligent, then all of the above could completely not apply! If it’s a true triple net (net-net-net or NNN) lease, then Tenant is responsible for the cost of repairs and maintenance anyway.

– Tenant needs understand the agreement before being bound by it. A commercial real estate lease ideally address who is responsible for what. It’s important to negotiate and comprehend the financial and legal results of the lease to avoid unexpected expenses and increases in payments.


Disclaimer:

This article does not create an attorney-client relationship. This article is for general education purposes only and is not legal advice. You should consult with a qualified attorney before you rely on this information.