I know I'm getting into a Triple Net lease but really its just a lease isn't it? Isn't the owner always responsible for all the physical stuff and I just pay him the rent? I have been in a long term triple net lease, do I need a commercial building inspection? I am getting ready to end my long term triple net lease, I dont need an inspection do I?
The simple answer is yes you do need an inspection. A bit of education is needed here.
What is a Triple Net Lease?
Per Wikapedia – A triple net lease: (Net-Net-Net or NNN) is a lease agreement on a property where the tenant or lessee agrees to pay all real estate taxes, building insurance, and maintenance (the three ‘Nets’) on the property in addition to any normal fees that are expected under the agreement (rent, etc.). In such a lease, the tenant or lessee is responsible for all costs associated with repairs or replacement of the structural building elements of the property.
The precise items that are to be paid by the tenant are usually specified in a written lease.
These are very basic definitions and there are many aspects or variables to each one, however, I feel you do need an inspection by an unbiased 3rd party and here is why:
- If you are getting into a triple net lease they usually run 5 years or more. You will be responsible for the above-listed items. What condition are they in now? What should I expect over the next five years maintenance-wise? Maintenance can be anything from paint to roofing and everything in between. Read the contract carefully and get any questions answered so you fully understand your responsibilities.
- If you are at the end of your lease what are your responsibilities? What items exhibit typical wear and tear and which are past that point. A good thorough general inspection will help you understand what condition your site is really in and what areas you will most likely to be responsible for.
- If you are in an extended lease it is a good idea to get a good thorough general inspection every 5 years so you know how things are holding up and what preventative maintenance is needed now or in the near future to help prevent or at least minimize future repairs or replacements.
Property Maintenance is Key
In my, over 30 years of experience good routine maintenance is the most important and beneficial thing that can be done to minimize unexpected expenses.
I recently did a lease inspection for the owner of a property that was going to be taking back possession of a large warehouse & office space from a tenant who had been there for almost 30 years. Very little maintenance had been done. The lessee was now most likely going to be hit with a large bill. Many thousands of dollars could have been saved with a good routine maintenance program.
One example of how this tenant could have saved a lot of money is in the parking lot. It was very weathered and worn. It had not had any maintenance for approximately 10 years. It was to the point that it really needed to be resurfaced. The cost difference between resurfacing and resealing is $.20 per sq. ft. to reseal and $2.00 per sq. ft. to resurface. This is 10X!!. Resealing is needed every 5 – 7 years for this type of facility and if done the surface will last almost indefinitely. In this circumstance, there was approximately 10,000 sq. ft. of the parking lot to be redone. This is a difference of $2,000 vs $20,000. That is just one area.
Get a good thorough general visual inspection before you get into a triple net lease. Get a good general physical inspection every five years and have a good overall maintenance program and you will save a lot of money, not to mention minimize the unexpected unpleasant surprises such as roof leaks and the AC going out at the most inopportune time. From my experience, a good thorough general visual inspection will usually save at least 10X the cost of the inspection.