Many property owner come to us with questions about an upcoming triple net lease negotiation due to their importance and complexity. ‘Zero landlord responsibility’ properties, such as single tenant fast food restaurant or large pharmacy have very popular in recent years since they are safe investments with long term leases guaranteed by large corporations. Most of those tenants sign a triple net lease – which means all (or most) of the landlord’s expenses are covered by the tenant. Those leases are usually very long, with terms of up to ten years, along with tenant options of an additional 30 years or more. It is therefore very important to dedicate resources and time to make sure those long term leases are favorable as possible.
Why is it Important to Negotiate a Triple Net Lease?
Impact on value – if you are purchasing, or negotiating a triple net lease on a new tenant – the lease terms will have an enormous impact on the value of your property. For example – if the lease does not include tenant’s reimbursement of insurance costs of the common areas – it means you are netting less profit and thus reducing the value of your property.
Transferability – assignment clauses and title restrictions are a key factor in triple net lease negotiations. A strong assignment clause means a tenant will not be able to assign the rights under the lease without your written consent. A client of ours was initially very happy when his long term tenant offered to assign the lease to a new operator for higher rent. But our financial analysis of the potential tenant discovered a poor record of paying on time and a low likelihood of success – which saved the client a potential headache.
The devil is in the details – ‘zero landlord responsibility’ sounds great in a vacuum yet in reality, the lease will need to reflect that through the process the triple nets are collected. Is the tenant paying quarterly or yearly? Are you paying the bill and then getting reimbursed by the tenant or does the tenant pays the property taxes directly? All those factors matter in the management of the property, which means a time investment and possible extra costs.
Who Should Negotiate a Triple Net Lease?
Many triple net leases are negotiated by the brokers involved in the deal – for the simple reason that it was probably one of the broker that put the lease together. We strongly believe you should hire an attorney that specializes in triple net lease negotiation – because unlike a real estate broker, a lawyer is not tied to the result of the lease. A broker will only make money if the lease is signed, and a real estate agent often makes a percentage of the total rent that will be paid throughout the term of the lease.
Unlike a real estate broker, we care about every part of the lease agreement since our compensation is not tied to how much rent we secure to our clients. Real estate brokers are often knowledgable about triple net leases and can provide great insight about various parts of the lease – especially what constitutes fair market rent. However, we recommend that you find an attorney to negotiate the more complicated parts of the lease – such as indemnification clauses and insurance requirements.
When is a good time to Negotiate a Triple Net Lease?
We found great success at negotiation triple net leases outside the normal and obvious times – expiration and new leases. Contracts can be negotiated at any time, for any reason, and it is never too late to amend some problematic clauses in your lease. One client approached us with a question about a possible amendment proposed by an anchor tenant in the middle of a 20 year lease term. We were able to successfully negotiate a rent increase with the tenant for the remainder of the term, without giving any significant concessions to the tenant.
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