Are You Losing Money on Your Commercial Real Estate Lease?
Written by Joe Killinger
I was having a conversation with a real estate investor a couple of weeks ago and during this conversation he was telling me about a property that he had in escrow and how he was having second thoughts about his purchase, he told me he feels he over paid and he is concerned that he will have to self-manage as he doesn’t feel he can afford a professional management company. The property he is purchasing it turns out is a retail building in a nice area and has recently had some upgrades, the property is 100% occupied by strong clients and a couple of the leases can be renegotiated to increase his income. The best thing that he has going for him is the fact that all of the leases are NNN. I recommended him to a property management company that I knew of and trusted so they could discuss the best ways for him to increase his return.
Another term for the NNN lease is a Triple Net Lease, net-net-net lease, or a hell or high water lease. The true definition of a NNN lease: A lease agreement that designates the lessee (the tenant) as being solely responsible for all of the costs relating to the asset being leased in addition to the rent fee applied under the lease. The structure of this type of lease requires the lessee to pay for net real estate taxes on the leased asset, net building insurance and net common area maintenance. The lessee has to pay the net amount of three types of costs, which how this term got its name.
After addressing his concerns with the management company, he learned that the management fees are considered a reimbursable expense, and if he hired a property management company, then the tenants would be the ones paying for the professional management not him. Additionally, he found out that the previous owner had not been charging back many of the fees that the tenants were responsible for. By hiring a professional, he was able to save thousands of dollars a year in expenses.
Although a NNN lease can give you considerable savings, there are many other types of commercial leases that have language in them whereby some expenses can be, and should be, passed through to the tenants. If you own commercial property and you aren’t already doing this, you may be losing thousands of dollars a year, and it may be time to get advice from your local real estate professional, whether it be a commercial agent or a property management company.