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Triple Net Lease Tips

Triple Net Lease Tips
 

If a commercial property owner decides to lease out a building to a business using a Triple Net Lease, the tenant is responsible for paying more than just the rent.  In most cases triple net lease tenants are also responsible for the following:

  • the cost of any maintenance or repairs the building may require during the term of the lease

  • the property taxes for the building

  • building insurance

The rent charged in the Triple Net Lease is generally lower than the rent charged in a standard lease agreement, since the tenant is covering these extra costs.

Often, the Triple Net Lease is called a true net lease, because the commercial landlord usually has no responsibility for the costs associated with the building’s maintenance, nor do they have any desire to even be involved in any matters related to the building’s upkeep.  The building can generate a high level of income while the tenant keeps it in good condition and handles any necessary structural and safety improvements.  With a Triple Net Lease, the tenant has many of the advantages of ownership, including control over the property, without the substantial capital investment that a new acquisition requires.

A Triple Net Lease, however, can be a challenge for both the tenant and the property owner, even though one might think that this type of contract favors the building’s owner.  The owner, of course, is happy with having the taxes, insurance, and Common Area Maintenance (CAM) all being taken care of by the tenant.  Unfortunately, problems may occur if the tenant neglects regular and fundamental maintenance.  Typically, when this type of lease is being negotiated, it is suggested that inspections be conducted at least once a year (along with an initial inspection to set a baseline for existing conditions that both parties, landlord and tenant, agree upon).  Disagreement may also occur if maintenance issues and expectations are not well defined under the Common Area Maintenance (CAM) fees.

As with any lease agreement, it is best for both parties to have clearly defined responsibilities that protect the interests of each.  Any variables should be completely documented, including anything related to various state and local structural maintenance codes, within the Triple Net Lease. Property owners will certainly want their investment protected and well-maintained just as much as they want to receive timely rent payments.  Owners will also want to know that the taxes and insurance are being paid on time.  From a tenant perspective, focusing on their business is a must; tenants will not want structural defects and liabilities to hinder normal business operations.  Therefore, it behooves both parties to insure that the lease agreement documents terms and responsibilities clearly.

The following are just a few tips regarding Common Area Maintenance (CAM) for commercial Triple Net Leases:

  • Carefully list the included common areas in the lease.

External areas, such as parking lots or garages, landscaping beds and garden areas, and employee picnic areas

       Internal areas, such as lobbies, public bathrooms, hallways, and elevators

  • Specifics regarding tenant improvements and structural repairs should be included.

Building strength maintenance, especially in California, is especially critical, as it relates to the safety of those occupying the building.  Tenants     sometimes may need to make decisions to add to the use of the building or to renovate spaces in the building; these changes could compromise the structural integrity of the entire property.  Typically, the tenant should be required to get approval from ownership prior to making such changes.  If the property owner is not aware of the tenant’s changes and renovations, they may be unaware of potential damage to their building. In addition, without prior knowledge of renovations, property owners are unable to ensure that improvements are done correctly.  It is important to note that building strength maintenance is usually considered as Common Area Maintenance (CAM) because if one part of the building fails in a disaster, it’s likely the rest of the building structure will also be negatively impacted.

  • Make sure that any documentation is specific and clear, especially when it comes to roofing concerns.

Roofing maintenance may have extra requirements in California.  Routine re-roofing is certainly a notable CAM requirement, however concrete tilt-up structures may have roof condensation problems that need to be addressed as well.  A roof collapse caused by condensation issues can have an immediate impact on the tenant.  Roof ledgers and insulation issues are generally considered to be part of a building’s basic structure; in most cases, the general point of view regarding roof condensation in a Triple Net Lease agreement is the same as with other structural repairs and seismic retrofitting.

Structural maintenance responsibilities should be part of every lease agreement, regardless of who pays for it.

When agreements are well-defined and documented, particularly with a Triple Net Lease, both tenants and property owners can be assured that their interests are protected and expectations will be met.  In the long run, the property is the owner’s responsibility, however, the people actually using the building will have a tremendous impact on its overall care and maintenance. The professional team at Saunders Seismic Commercial Retrofit can provide a complete building inspection that will meet the needs of both the property owner and the tenants.  In addition, Saunders Seismic Commercial Retrofit has experienced crews that can address structural maintenance, seismic retrofitting, and roof condensation conditions. To get more information on the requirements for building strength in California or regarding what to include in a Triple Net Lease, call Saunders Seismic Commercial Retrofit today!

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(949) 646-0034

 

 

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