The idea of managing a triple net (NNN) lease property makes sense to a lot of real estate investors. After all, the tenant will bear virtually 100% burden and risk of property management and this is very exciting to investors. Management-free ownership may be the case for many NNN net lease properties, but often the fine print of the lease can cause an inattentive landlord to stumble. When negotiating such a triple net lease, an owner needs to be aware of the issues that can hinder his ability to collect the maximal NOI possible.
The following outlines FIVE of the common mistakes that NNN net lease owners must avoid to realize the greatest possible yield from their investment property:
- Many leases that are considered NNN will actually direct that the landlord is responsible for expenses relating to the roof and structure of the property. Such expenses, though not on-going, can be costly and an owner should budget to cover them.
- Letters of Intent (LOI, or term sheets) are typically unenforceable expressions of intent, they are a useful tool in negotiating a favorable lease. In negotiating LOI, it is important to set parameters. If you need expansion options or renewal options, be sure your tenant addresses your concern in the LOI. Although a LOI is not binding and landlords can retract an offer, owners’ ability to lease space can be adversely affected if they earn a reputation for reneging on LOI.
- Make sure tenant is responsible for all landscaping, snow removal, cleaning and maintaining the road.
- Keep copies of all receipts for expenses that tenants can reimburse such as insurance and property taxes since the tenant can require copies of receipts as a condition for reimbursement of the reported expenses.
- Most NNN leases provide that the tenant may not assign or sublet without the landlord’s consent and that the landlord may withhold its consent for any reason or no reason. Landlords should at a minimum set forth the requirements and parameters which will be used to judge the suitability of a proposed subtenant or assignee. These parameters may include, for example, financial statements, reputation, guarantees and experience.
- Even if an NNN property owner has kept careful record of expenses, the lease may specify that a tenant is no longer liable for reimbursements if the owner has not delivered a bill or reconciliation statement after a certain number of days. Also, late fees incurred by the landlord cannot be passed to the tenant.
Leases are documents that represent the written culmination of a negotiated transaction. Although there are obvious similarities between many NNN lease transactions, each transaction is unique and there is no “standard form” lease that is appropriate for all situations.
Engage an expert brokerage like The Triple Net Investment Group, who is intimately familiar with the NNN leasing process, NNN lease documents and their hidden traps to ensure that your transaction will go super smoothly.