Lease agreements: triple net lease
Saving money:When running a child care center, finding savings where ever possible feels like the right thing to do, but is signing a triple net lease the right choice for your business? A triple net lease requires the tenant of the leased property to pay monthly rent as well as property taxes, property insurance, and to perform regular building maintenance. Due to the burden placed on the tenant; landlords are often willing to lease property for slightly below market value if they are NOT executing a standard lease. When using a triple net lease, the landlord is saving on building maintenance costs, insurance, and property taxes, and the tenant is saving on monthly rent. Does this sound like a good deal for both parties?
Deferred maintenance:Child care centers operate LONG hours on a daily basis. Many owners put in long weekend hours on paperwork related to running a business with employees, taxes, and compliance to meet. When a triple net lease is signed the weekend just got busier for the owner who is responsible for maintenance and upkeep of the building and property. Some routine areas of maintenance often overlooked are cleaning gutters, trimming dead tree branches, clearing roofs of debris, maintaining parking lots, and opening access to storm drains as well as assuring equipment such as stoves and sprinkler systems are properly functioning. Business owners have a natural tendency to address the most pressing issues for their business in the time they have to work on a particular day. Maintenance items that tend to be placed on the back burner are those items that gradually get worse until a malfunction occurs. Some examples include the dying tree that has been standing strong for several years, gutters gradually filling with silt and debris, storm drains collecting ever increasing amounts of dirt, leaves, pine straw, and trash.
Weigh the costs:Remember, signing a triple net lease requires the child care center to purchase insurance on the building in addition to performing maintenance. If a dying tree falls on the building the child care center will now have to pay the property insurance deductible. Likewise if gutters, storm drains, sewers, or sprinkler systems fail the center will be responsible for the insurance deductible and any repairs the insurance policy may not cover. In the meantime, the building owner who has an interest in the property being well maintained has placed the maintenance responsibility on the tenant. Any deferred maintenance that negatively affects the appearance of the property, such as dead trees, now gives the appearance of a run-down center and may cause potential clients to look elsewhere for their child care needs.
Problem solving:If you just realized your center is in an unfavorable lease agreement with the building owner there are options. First priority is to make sure as the responsible party you are having building and property maintenance completed either by staff or hired contractors. Paying a contractor to handle maintenance is a much better option than ignoring it for long periods of time.
Review your lease and consider renegotiating at the contract end for a more traditional lease. You may pay more for monthly rent, but if you weigh this against the costs of property insurance, maintenance and property taxes you may find you come out ahead. Also, a good time to negotiate lease terms if the landlord is presenting a triple net lease is at the beginning of the term before the paperwork is signed. The landlord may be willing to take care of many maintenance items in order to encourage a new tenant to sign. Spell out the terms of the maintenance items to be done so there are no questions after the agreement has been signed.
Since laws vary by state it is a good idea to have a real estate attorney in your state review the lease for potential problem areas. Many leases are written one-sided in favor of the landlord and require the tenant to agree to accept liability for all accidents that may happen on the property regardless of their cause.
As a business owner if you have good service vendors to perform various aspects of property and building maintenance a triple net lease may make sense. Where we see problems is when owners wait until they have a problem and contact the landlord for assistance only to be told they’re responsible. This delays the maintenance further and can result in unnecessary property damage and insurance claims.
*Markel Specialty is a business division of Markel Service, Incorporated, the underwriting manager for the Markel affiliated insurance companies.