Triple Net Leases: Why a Commercial Inspection Matters Before You Sign
Signing a commercial lease is a major commitment. Signing a triple net lease (NNN lease) can carry considerably more responsibility.
Under many triple net lease structures, the tenant is responsible for more than monthly rent. Depending on the terms of the lease, the tenant may also be responsible for property taxes, insurance, maintenance, repairs, and portions of major building systems.
This can make the physical condition of the property an important part of the financial decision. Deferred maintenance can be an additional concern. Previous tenants may have postponed repairs, performed temporary fixes, or invested only what was necessary to keep the business operating. These conditions may become the responsibility of the next tenant, depending on the lease terms.
Before signing a triple net lease, have an attorney help you understand your contractual responsibilities and a Certified Commercial Property Inspector evaluate the property's physical condition. Understanding both can help you avoid unexpected repair obligations and expenses.
What Is a Triple Net Lease?
In a traditional residential lease, the property owner generally retains responsibility for many building expenses and repairs. Commercial leases, however, come in different forms, each with its own allocation of responsibilities. Under a triple net lease (NNN lease), many of these expenses and repair responsibilities may shift to the tenant.
Unlike renting an apartment, where you typically call the landlord when something breaks, a triple net lease may leave you responsible for arranging and paying for the repair yourself.
The exact responsibilities depend on the lease agreement, but a tenant may be responsible for expenses involving:
Roofing
Heating and cooling equipment
Electrical systems
Plumbing systems
Building exterior and envelope
Parking lots and sidewalks
Sewer and drainage systems
Property maintenance
Insurance
Property taxes
Repairs and replacement of building components
You may be leasing the building, but you could be assuming financial responsibility for portions of it as if you owned it.
The lease establishes the legal responsibilities. A commercial inspection helps establish the observed physical condition and deferred maintenance of the property before you accept those responsibilities.
The Condition of the Building Can Change the Economics of the Lease
Consider a commercial space with rooftop HVAC equipment approaching the end of its expected service life.
The system may be operating on the day you tour the property. However, if the lease makes the tenant responsible for HVAC repairs or replacement, an aging unit could become a substantial expense during the lease term.
The same principle applies throughout a commercial property.
A roof may currently be serviceable but have deteriorated seams, previous repairs, or evidence of leakage. An electrical system may function but contain conditions requiring repair or modernization. A parking lot may have developing deterioration. A sewer lateral may contain root intrusion, deterioration, displacement, or an obstruction.
Individually, these conditions may be manageable.
Collectively, they can materially change the financial picture of a lease.
What Should Be Evaluated Before Signing an NNN Lease?
The scope should be appropriate for the property and the responsibilities being considered in the lease. A commercial inspection may include evaluation of accessible portions of:
Roofing
The roof can represent one of the largest potential building expenses. An inspection can document visible deterioration, repairs, drainage concerns, penetrations, flashing conditions, and other observable concerns.
HVAC Systems
Heating and cooling equipment should be evaluated for condition, operation when appropriate, approximate age when determinable, visible deterioration, and other indications relevant to future maintenance or replacement planning.
Electrical Systems
Commercial properties can contain electrical systems installed or modified over decades of changing occupancy. The inspection may identify observable concerns involving panels, receptacles, wiring, disconnects, distribution equipment, and other accessible components.
Plumbing and Sewer
Leaks, deteriorated piping, drainage concerns, improper installations, and aging materials can create substantial repair costs. A sewer camera inspection can provide additional information about the accessible portions of the building sewer or lateral, including conditions not visible during a standard commercial property inspection.
Exterior and Building Envelope
Walls, windows, doors, sealants, penetrations, masonry, siding, and other exterior components help protect the building from water and weather. Moisture intrusion can lead to deterioration extending well beyond the location where water first enters.
Site and Parking Areas
Parking lots, sidewalks, grading, drainage, retaining walls, exterior stairs, and other site components may also become maintenance responsibilities under a commercial lease.
Interior Components
Interior observations can reveal evidence of moisture intrusion, previous repairs, damaged finishes, accessibility concerns, deferred maintenance, and conditions involving components serving the leased space.
Triple Net Lease Inspections Are Not Just About Finding Problems
A commercial property inspection should not be viewed simply as a search for defects. Its greater value is reducing uncertainty. Every commercial building has maintenance needs. Older buildings will often have aging components, repairs, alterations, and deferred maintenance. Even newer properties can have installation or construction deficiencies.
The objective is to understand the property you are considering and make a more informed business decision.
The inspection may help you identify:
Conditions requiring immediate attention
Deferred maintenance
Aging building systems
Potential near-term capital expenses
Areas warranting specialist evaluation
Items to discuss with the property owner
Conditions potentially affecting lease negotiations
Finding an issue does not necessarily mean you should walk away from the property.
The information can help you better understand the potential cost of occupying the property, plan for future expenses, and negotiate lease terms before assuming responsibility for existing conditions.
The Best Time to Discover a $20,000 Problem Is Before You Sign
Suppose an inspection identifies aging HVAC equipment, roof deterioration, and a deteriorated section of parking lot.
Those findings do not automatically make the property a poor choice. Instead, they create questions worth answering before the lease is executed:
Who is responsible for these items under the proposed lease?
Will the landlord repair or replace anything before occupancy?
Should responsibility for an existing condition be addressed within the lease?
Does the anticipated maintenance expense change the economics of the location?
Should an HVAC contractor, roofer, electrician, plumber, structural engineer, or other specialist perform additional evaluation?
Once the lease has been signed, your negotiating position may be very different.
Make the inspection part of your due diligence — not an afterthought. Before signing, work with your commercial real estate broker and attorney to determine when inspections can be performed and how inspection findings can be addressed during lease negotiations.
Before you sign the lease, understand the building behind it.
1st Edge Inspections provides commercial property inspections and triple net lease evaluations for tenants, property owners, investors, brokers, and attorneys throughout Iowa and surrounding service areas.
Our commercial inspections are tailored to the property, the client's objectives, and the agreed inspection scope. Available inspection tools and services may include thermal imaging, drone observations, moisture evaluation, and sewer camera inspections when appropriate.
Considering a commercial property or negotiating a triple net lease? Contact 1st Edge Inspections to discuss your property and develop an inspection scope appropriate for your due diligence. Get The Edge on your next property!
1st Edge Inspections
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