Triple Net Lease Review – Why is it Important and how to do it
When you purchase a property, it is very important to conduct a triple net lease review. Triple net properties with single or double tenant is now a very popular real estate investment. However, it is misunderstood by many investors for a simple reason – most brokers and buyers fail to understand that the triple net lease is the most important part of the purchase. In fact, in leases longer than 10 years, you are actually purchasing the lease, and it should be the main focal point of the transaction.
Review the Triple Net Lease During Escrow
Single serve restaurants with triple net leases are the fastest growing investment avenue for passive investors. It required minimal landlord responsibility, steady returns, and security in the form of a long term lease secured by a corporation (at lease most of the time). The initial terms on those triple net leases are almost always at least ten years, with multiple tenant options over 20 or years. It is therefore very important to focus on the lease agreement – the terms and obligations between the landlord and the tenant.
Conducting a triple net lease review during escrow does not only protect you, it can help you negotiate the price further. No lease is perfect and if you spot an important missing link in the net lease – you can bring it to the attention of the seller and request a price modification. One of out clients came to us during escrow for a purchase of a portfolio of single-serve-restaurants scattered across multiple states. All properties had the same corporate tenant with the same triple net lease. After careful review, we spotted a small but significant clause in the lease that limited the tenant’s responsibilities for paying property taxes if the tax payment increases after a sale. The marketing materials did not reflect the impact of this language in the contract and we successfully requested a price reduction for our client
Triple Net Lease Review for a New Tenant
Triple net lease review for a new tenant is crucial for your long term success and relationship with the tenant. Most of the triple net leases with large corporations will force you to use a lease draft that is not your own. However, you can and should negotiate the terms of the lease, even if the tenant agrees to pay the monthly rent you requested by your real estate broker. Here are some, but not all, of the important parts to pay attention to:
Use – you want to make sure to allow a limited use to the tenant. Use clauses in a triple net lease will allow the tenant to claim exclusivity over a certain certain trade activities. For example – Starbucks Coffee will require exclusive use for ‘non-gourmet’ coffee and espresso. Tailoring the language as narrowly as possible will give you maximum flexibility in the future.
Insurance – in triple net leases the landlord is usually responsible for the common areas, and the tenant is responsible for liability inside the store. Important to note here is a requirement to include the landlord as a 3rd party beneficiary to the insurance certificate, and set sufficient limits for coverage in case of a loss.
Option to Purchase – this is a key point we emphasize for all of our clients during a triple net lease review – options to purchase the property by the tenant are very restrictive and give the tenant immense power in the event you want to sell the property.