Who Pays for Structural Repairs in a Triple Net Lease?
Before finding out who is obliged to pay for the repairs in the triple net lease, it’s better to outline the major types of commercial property leases, their characteristics, and their benefits both for an owner and tenant. There are two main types of leases that are characterized as the following: a gross lease is when an owner pays for all expenses for the property, while a tenant pays just for the rented area. A net lease is divided into single, double, and triple options, meaning:
A single net lease is when a tenant pays for property rent and taxes.
A double net lease means insurance expenses are added to the rent and taxes.
A triple option is when a tenant must pay rent, taxes, insurance, and fees for property maintenance. The last net lease option includes a full package of expenses for a tenant: property rent, insurance, taxes, maintenance, and repairs.
A triple net lease is believed to be a safe and reliable lease type since it’s beneficial for a long-term period and if a tenant rents most of the whole building. In the NNN lease, the owner is obliged to pay for the structural repairs. However, there can occur some disputes about what we call repairing and what is capital expenditure.
Advantages of the NNN Lease Investments
A triple net lease brings a range of benefits both for tenants and investors owners that imply the absence of expenses for a landlord for the property, and lessees get a lower rate for renting. That’s the reason why most tenants like this lease type, moreover, due to the increasing sense of property ownership. Let’s define the pros of the triple net lease to help you assess the sense of its financial benefit:
Reducing a lessee turnover because the NNN lease provides them with long-term occupancy, for instance, for 10-15 years. This feature guarantees the investors with high reliability of the chosen tenant.
Vouching for stable passive income for an owner with constant cash flow and no worries about recruiting lessees.
Minimum financial responsibilities fall on the landlord’s shoulders. Although, a tenant is obliged to pay maintenance costs, taxes, and insurance for the property. Nevertheless, lessees can enjoy a lower price for monthly rent, and these points get them interested in keeping the building in a decent state.
The possibility to transfer properties between investors-owners and not worry about building origin to the specific tenant. It’s OK to change hands many times in case of the NNN lease.
It enables owners to be more flexible according to the market conditions to earn higher profits by omitting risky investments.
Landlords are free from growing expenses for property maintenance because of a sudden uptick in prices for building materials, labor, insurance, etc.
To sum up the NNN lease advantages and its owner-friendly features, it offers the landlords minimal management of the property since they’re in charge of accounting, tax returns, and the ability to decide when to add extra financing for their properties.
Additionally, before signing the NNN lease agreement, a tenant and owner should keep in mind several tricky things about this lease type. For example, an investor should present properties portfolio so as not to lose their investments and look like a trustworthy landlord for tenants. It’d be better if a single tenant rents all their commercial property, including any building, malls, restaurants, or pharmacy chains. So, the owner guarantees their investment return in a short time.
Another aspect is connected with tax payment. An investor who has already sold all property can transfer the initial capital to the new NNN lease contract and not pay any extra taxes, which is called a 1031 deferred tax exchange. But, at the same time, they’re not eligible to get a 20% tax deduction because of their passive engagement in business management.
Concerning the tenants, they still can benefit from a triple net lease contract despite the fact that they bear all the responsibility for the property payments. A lessee can change the rented building and arrange it according to their preferences to fit their brand essence.
Responsibilities That Fall on the Tenant and Landlord: Are There Any Disputes?
To tell the truth, there can be various options concerning who is responsible for a particular aspect. A tenant and owner should have an agreement about their shares of responsibility. That’s why conflicts are possible because of expenses on electricity, plumbing, and HVAC.
Let’s discuss what responsibilities fall on a landlord. Generally, their responsibilities are limited to repairing, upgrading, and replacement of the roof, exterior walls, and utility repair. Also, a landlord has to pay central plumbing and electricity expenses. However, these expenses and responsibilities can change and be negotiated with a tenant.
Concerning the responsibilities up to a lessee, they predominantly have to pay maintenance fees and operating expenses such as installing security systems, janitorial service, building and landscaping fees, inspection, and lighting. Nevertheless, a tenant should negotiate all conditions to details with an owner.
In case you doubt whether roofing issues fall on a tenant’s expenses, it’s better to negotiate previously with a landlord. By the way, it’s more advantageous for the owner to replace the roof before renting a property since it’s possible to increase property value significantly. Still, roofing repairing is on the owner’s shoulders mentioned in the lease contract.
Speaking about a triple net lease, a lessee pays a lower rent rate because they pay much for other property maintenance fees. At the same time, a tenant is obliged to pay for everything, including structural repairs, in case of an absolute triple net lease.
In short, it’s vital to negotiate to determine each party’s responsibilities in the NNN lease. Although a landlord is responsible for providing a tenant with a properly maintained building with good upkeep, a lessee is responsible for keeping it in a good state, avoiding repairing and even capital renewal. But, taking into consideration the above-mentioned information, we can’t state for sure who pays for structural repairs in a triple net lease because the conditions of the agreement between a tenant and landlord can be negotiated and can fall on each party.