We gave an overview of various dental lease types in a previous post. In this one, we'd like to go into more detail about triple net leases. Unlike a full-service lease, a net lease requires you to pay extra on top of the base rent. A triple net lease, as the name implies, requires you to pay three extra things. On top of the normal rent payment, a triple net lease will have you paying the taxes, insurance, and maintenance costs for the property. Depending on the terms of the lease, you may also be paying for utilities.
Why do landlords prefer triple net leases?
By shifting more costs onto the tenant, landlords are able to remove some of the unpredictability that comes with leasing a property. If the costs for taxes, insurance, or maintenance go up, a landlord knows that he will not be the one that has to eat the cost of the increase. Because such leases are a better form of risk management versus full-service leases, landlords often prefer them over other options.
Of course, under this type of lease, the overhead that the landlord would have been taking care of falls onto the tenant and along with it comes all of the expense uncertainty that the landlord was trying to avoid. Because your real estate overhead will be increased, as a tenant you will want to be sure to negotiate the best terms possible.
How the triple net lease favors the tenant
Why do a triple net lease? Triple net leases allow you a little bit of your own freedom as a tenant. Because you will be taking on the costs of taxes, insurance, and maintenance, the base rent is typically lower than it otherwise would be.
It is also possible that with proper negotiation the landlord will be willing to take on some of the expenses. They might cover utilities or certain types of repairs.
Single tenant leases offer an additional benefit. Because you are in control of the insurance and maintenance, this form of lease could also allow you to shop around for the best deals and to decide which maintenance tasks need repairing. The terms of the lease will put some restrictions on that freedom, of course, but you are not obliged to pay whatever the landlord chooses to charge in order to cover those costs.
Triple net lease considerations
Although it is a highly favored form of lease, a triple net lease might not always work in the landlord's favor. Putting the responsibility on the tenant takes control out of the property owner's hands. Because of that, there are important considerations to be made by all parties for each of the three expenses that the tenant will take on.
- Maintenance - What level of maintenance will the terms of the lease require? If a tenant allows a property to become in a state of disrepair, then it will lower the property's value. This is not something that a landlord will want to have happen.
- Insurance - What amount of insurance will be required? Again, if a tenant cheaps out on the insurance, or is allowed to not purchase it at all, then the property owner could be in a lot of trouble should disaster strike.
- Taxes - If an unfair appraisal comes in that increases the property taxes, a property owner can contest it. Since the landlord is not the one paying the bill, they may not bother. Similarly, a tenant could move out before taxes are due and the landlord will be stuck with the bill.
What if there are multiple tenants?
Not all leased spaces are single tenant buildings. If your practice is part of a shopping center, for example, then there may be several other tenants in the same property. In cases such as this, it is not practical to let each person be responsible for maintenance and not possible to let them each be responsible for taxes or insurance.
When multiple tenants spaces are leased under triple-net terms the landlord will pay the expenses, but pass the costs on to each of the tenants. Therefore in multiple tenant scenarios, some of the freedoms you had before do not exist. How the cost is split up is defined in the lease. If you are considering opening your practice in a multiple tenant building, you should pay close attention to how the costs are split up.
Leased space pro-rating versus occupied space pro-rating
Typically, the split will either be pro-rated between leased space, or occupied space. If you are one of a few tenants in a new construction, then a lease based on occupied space could be very expensive. In that situation, the few people who are leasing space will be paying the costs of the entire building until it is at full capacity. The same as true if tenants leave over time. The remaining tenants will have to assume the responsibility for those costs.
A contract pro-rated by leased space is better, but could still have some problems of its own. A new tenant must pay attention to how leased space is defined. If the landlord has chosen not to rent a space at the current time, does that still count as part of the total? If not, then the active tenants could once again see their costs rise.
Whether you are leasing a single tenant space or a multiple tenant space, there are a number of considerations to make for triple net leases that will impact your final costs. We have experience handling contract negotiations and would love to go to work getting you the best deal possible. If you are looking to lease office space for your dental or medical practice, please take the time to check out the services that we offer for contract negotiation.
Feel free to browse the rest of the site to see if there is anything else we can help you with. We specialize in legal issues facing doctors and dentists and would be glad to answer any questions you may have.