Financial Issues to Consider in Triple Net Leases- Tips for Tenants
Triple net properties are popular investments that attract investors globally. They are low risk and are a worry-free method of owning property. Imagine owning a building and not have to manage it? Well, these properties benefit both investors and tenants alike. As a tenant, have complete control of the property. You pay rent and manage other expenses like tax, insurance, repairs, and more. You also pay a lower base rent and enjoy more extended lease periods. However, there are financial issues to be clear of when leasing such properties.
What’s involved in a triple net lease?
This is a commercial lease agreement whereby the tenant agrees to cater to the rental amount and the property’s expenses. These include taxes, insurance costs, and maintenance expenses during occupancy. In this lease agreement, almost all costs fall on the tenant.
Does it favor the landed than the tenant? This seems so, but the tenant has room to negotiate the rent terms. Since the tenant pays all the landlord’s expenses, they can negotiate a favorable rent rate depending on the associated costs. Also, with the many triple net lease opportunities and listings available, you can get the best option for your needs.
What financial issues should a tenant watch out for?
Triple net leases are pretty common. Such leases eliminate the unknown financial risk related to commercial properties. If the cost of maintenance, tax, and insurance rises, the tenant bears the extra expenses.
There are various issues to watch for as a tenant; these are;
- Expense calculation
In the case of multiple units in a property, you share the costs as tenants. It’s best to have a keen look at the calculation of the expenses. What are the determining factors? The estimation can be based on the leasable space or the occupied space. If it’s based on the occupied area, this can be overwhelming in some cases.
For instance, if you’re ten tenants who split the costs, you pay a lower amount when all units are occupied. But, when some tenants vacate, the remaining tenants will have to share the expenses, meaning you’ll pay higher amounts for the property costs. Therefore if the overhead costs are based on the leasable space, pay attention to the definition. This avoids misunderstandings or hefty payments in the future.
- Check the type of lease.
Maintenance and other property costs keep on changing. When they rise, most tenants tend to terminate the lease agreement or obtain a rent concession. To avoid this, most landlords use a bondable net lease. In this agreement, you can’t end the triple net lease agreement before expiry.
Also, the landlord can’t alter the rent amount for any reason. This may put you in a tricky position as the tenant in case of a significant increase in ancillary costs. It’s then advisable to examine the agreement and understand all the terms when renting the property.
Triple net leases are great options for investors who don’t want to bother about property maintenance many other essential expenses. They are ideal for tenants who wish to have complete control of the property. As the tenant, you can negotiate lower rent terms depending on the maintenance costs involved. However, it’s advisable to go through the lease agreement and understand all the clauses.