Triple net lease properties are rich in opportunity for both property owners and tenants alike. As an investor, you can create a reliable income stream from your property, and as a tenant you can establish a footprint for your business.
However, there are going to be expenses associated to maintaining your triple net property, from standard operating expenses to structural repairs to keep the building updated, safe, and profitable.
While these expenses are a given in any triple net deal, the division of financial responsibility between the property owner and the tenant tend to be a bit murkier and we are often asked questions such as: What am I, as the property owner, responsible for a triple net investment? Which costs can/should I pass through to tenants (and how do I do that fairly?)
To help address such questions in the owner/tenant responsibility debate, here are four key triple net lease tenant improvement factors that you should consider when you’re negotiating a net lease or entering an existing NNN lease by investing in a new commercial property.
Which Triple Net Property Repairs Are (Generally) Owner Responsibilities?
As the triple net property owner (unless otherwise specified in the NNN lease), you’ll generally be responsible for maintaining and repairing these 3 main aspects of your building:
- Roof (repairs, maintenance, upgrades)
- Exterior Walls
- Utility Repairs and Upkeep (for major things such as plumbing and electricity)
What Operating Costs Are Typically Passed Through to Tenants?
One of the key advantages for triple net property investors is that you can use your property to generate income, without all the day-to-day tasks and expenses related to property ownership and landlord duties. This is because you can pass along building upkeep duties and expenses to the tenants who will be occupying and running their business from your building location. These expenses and responsibilities often fall under tenant responsibilities in NNN leases as costs of operation for the business.
In a triple net lease, operating costs, maintenance fees, and improvement responsibilities are typically passed along to a tenant operating their business in the commercial space, including (but not limited to):
- Security Improvements or Systems
- Major Building Improvements (Less Capital Improvement Expenditures)
- Janitorial Services and Expenses
- Association Fees
- Building Management Fees
- Parking Lot Maintenance (Upkeep, Repairs, Re-Paving)
- Inspection Fees
How Should You Divide Capital Improvement Costs?
The division of improvement costs between the landlord and the tenant is often based whether or not the expense is related to capital improvement of the building. These types of improvements are frequently deemed the responsibility of the tenant or will be passed through to the tenant in the form of increased rent. To keep things fair, and ensure that they can take full advantage of the improvements or repairs they’ve funded, a tenant may request amortization to spread out the cost of the improvement over the lifespan of that improvement.
However, the definition of capital and non-capital improvements is another murky area, so it’s prudent to understand what’s outlined specifically in any NNN lease you’re taking over with a new commercial property purchase. Likewise, in a new or renewing lease, it’s vital to understand which items you are passing through to the tenant and ensure the terms are very specific.
What Ultimately Determines Financial Responsibility in Triple Net Lease Improvements?
If there’s one certainty in net lease real estate, it’s this: negotiation. While there are generally things that owners are financially responsible for with regard to building upkeep and repairs (as well as items commonly passed through to tenants to maintain and fund), each triple net property deal will be unique according to what’s been negotiated in the deal.
Triple net leases can vary dramatically, depending on what deal is negotiated and how financial responsibilities are outlined in the lease. Working with an NNN lease expert whenever you’re investing in a new commercial property is key to ensuring your profitability, and also avoiding excess or surprise expenses on your property.
If you’re bringing a tenant into a property you own under a NNN lease agreement, then you can benefit from working with a net lease advisor to properly structure your lease according to your exact goals and specifications. You’ll also need to vet your prospective tenants carefully to ensure that they have reliable credit profiles, proven business success, and plans to operate a business in your property with longevity.
Sands Investment Group has extensive expertise in triple net real estate, and we know exactly how to advise clients on the best way to handle triple net lease tenant improvements. In fact, we’re the fastest growing net lease investment company in America, with over 1,500 transactions in 48 states (to the tune of $3.5 Billion) since 2010, so we know what deals will turn your best profit, while offering fair, attractive tenant terms.
Want to learn more about NNN properties for sale and speak with an industry expert about current commercial investment opportunities? Get in touch with an expert today by calling 844.4.SIG.NNN or sending us an email at info@SIGnnn.com.