Negotiate Now or Get Hosed Later
August 03, 2015
- Many of my clients approach searching for new commercial space with enthusiasm, find a property that meets their requirements but grow impatient when lease negotiations take too long.
- However, understanding and negotiating the most favorable terms is really the most important step in the process.
One of the most complex concepts in Commercial Leasing has only three letters: Net. This little word can have a profound impact on a tenant’s bottom line. When you sign a Net Lease, you will be responsible for building operating costs which might include property taxes, insurance, repairs, building maintenance and utilities. Property owners prefer this type of lease because it shifts more costs to their tenants.
To entice tenants to agree to pay building operating costs, a Net Lease will typically have a lower stated rent. However, may tenants end up receiving a large, unexpected bill which they have obligated themselves to pay. A Net Lease may be Single, Double or Triple Net (NNN) depending on which items are allocated to tenants.
A Single Net lease is pretty straight forward: the tenant is responsible for paying the property tax on the space in addition to the rent. The landlord will collect a portion of the taxes from each lessor, then pay the bill himself. Unless there is a drastic increase in property tax rates or property values during the term of the lease, the costs are fairly predictable.
Most commercial property owners prefer the Double Net Lease. With this lease, the tenant pays property taxes and insurance premiums on the building. Here, there is a greater risk of an increase because insurance premiums may increase annually.
A Triple Net Lease is also referred to as Net-Net-Net or NNN by industry insiders. Of all the Net Leases, this one can be most problematic for small businesses. When you sign a Triple Net Lease, you are responsible for items related to building maintenance and repair in addition to taxes and insurance. If the building requires extensive repairs during your occupancy, you may find yourself looking at a large, unexpected expense.
Before signing any type of Net Lease, it is important to ask how the expenses will be allocated. The most common method is to allocate the expense based on percentage of space occupied. While this method is probably acceptable for a Single or Double Net lease, a Triple Net Lease is more complex to allocate. For example, tenants with the same square footage may not contribute to wear and tear to common areas, elevators or utilities equally.
That’s why working with an expert in Tenant Representation is so critical. While we are negotiating arcane terms in your lease, you can be doing what you do best: running your business.
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