Is a triple net lease bad for a first time office renter?
I'm looking at renting an office but up until now have never had my name on a lease. I've always subleased from others or worked in coworking spaces. I've found a great new opportunity to go off on my own but they're saying that the space is a triple net lease. It sounds like I would be liable for paying some pretty hefty fees if anything broke. Why does this fall on the tenant and is this a bad choice for a first time commercial office space rental?
[{"id": "g8tsatt", "text": "The vast majority of commercial leases are NNN.", "replies": [], "depth": 1}, {"id": "g8tscsr", "text": "NNN leases are pretty much standard. Operating Expenses, Taxes and Insurance are reimbursed to Landlord, pro rata.\n\nWhat do you mean by hefty fines if something broke?", "replies": [{"id": "g8tublm", "text": "Depends on location. In my market (Seattle) full service is still the standard for office space though there has been a growing trend towards NNN.", "replies": [], "depth": 2}, {"id": "g8u1u38", "text": "If the roof caved in or the hvac was on its last leg.", "replies": [{"id": "g8udojw", "text": "Often those big capital items will not be your responsibility in a typical multi-tenant office with net leases. Usually that only the case in true NNN leases for single tenant situations. As others have said, it\u2019s all in the lease.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "g8tsts5", "text": "As other have said, commercial will nearly all be NNN unless it\u2019s an old retail strip center or multitenant industrial building. Big expenses, like foundation repair, roof, etc. will still be the landlord\u2019s responsibility in a NNN, though, if that\u2019s what you\u2019re referring to", "replies": [], "depth": 1}, {"id": "g8tt2wv", "text": "If I could go back in time on my first lease, I would confirm what the history of NNN expenses had been.  I would ask whether there are any anticipated capital improvements coming up and who is responsible for them.  \n\nAlso, I would confirm how the square footage was calculated.  There will be a load factor that is included in the lease.   So, your space might be a net of 1,000 square feet (inside the walls), but they actually calculate it from exterior walls (which is still permissable), and then they add in the common area (load factor).  When I bought my first building, I never confirmed actual square footage.  It's fine to rent something using different calculations, but you just need to know the actual numbers.", "replies": [{"id": "g8v5f1e", "text": "Agreed, you should always have the actual square footage, but consider that certain buildings have shared amenities, large impressive lobby's, elevators, gyms, bathrooms, storage etc. Those buildings need to account for these costly luxurious amenities, and that happens with the aforementioned load factor.\n\nIt's hard to justify that claiming the space is 'larger' than it actually is, is sensible or fair, but it is 'fair' unless you don't know about; fortunately or unfortunately it is the standard prescribed by BOMA.\n\nIf you want a purely space for rent comparative, you may need to do some work, or look at the all in number and how many employee workststions can occupy the space.", "replies": [], "depth": 2}], "depth": 1}, {"id": "g8tt8iv", "text": "Triple net is common.  Read the contract offered and negotiate.  It should spell out what you are liable for versus the landlord in great detail.  Roof, windows, doors etc.. the skin of the building is likely the landlord's responsibility.  Plumbing, toilets, sinks, water heater, HVac, light fixtures, light bulbs etc.. are often negotiable.  Larger landlords have a contract with a maintenance company and can fix things more efficiently than you can so push to either have them cover things you worry about or, have them install a new system as a condition of moving in.\n\nLED lights if they haven't upgraded yet will help a lot with your electric bill.  You can often get new carpet or paint if needed as part of the negotiation.   Maintenance costs for common areas, elevators etc.. is often shared among tenants and the allocation and costs are determined by the landlord and need to be monitored.  You might check with another tenant in the building to see if those things have seemed reasonable in the past.\n\nI'm pretty sure that in most markets today covid has given some renters more bargaining power in office space leases.", "replies": [], "depth": 1}, {"id": "g8ttcxd", "text": "If it\u2019s not NNN and you have FS or IG lease, you\u2019ll still be paying for thing, it\u2019s just be more extensive monthly estimates (aka CAMs) to the Landlord. With a NNN you can at least control when and the cost of repairs.", "replies": [{"id": "g8v54n5", "text": "What does IG mean in your world?", "replies": [], "depth": 2}], "depth": 1}, {"id": "g8tup36", "text": "Ask to see prior years' billings so you can see what is being passed through to the tenant. Make sure you have an expense stop, such as 2019 as your base year, from which expenses are calculated. Strongly urge you to have a great commercial real estate agent help you with the lease. It's not things that break, but typicall NNN is you paying a proportionate share of management fees, utilities, taxes, insurance, landscaping, minor roof repairs, etc. Capital improvements should be excluded but the lease needs to state that.", "replies": [], "depth": 1}, {"id": "g8tv1j0", "text": "As long as you know the cost of the NNN. If they are anticipated to increase. Don\u2019t rely on a landlord to tell you if they think they will increase. For instance if prop 15( increase in commercial prop tax) in CA passes, every NNN is going to increase dramatically. I would recommend negotiating a cap on the NNN increase. For example, NNN can only increase by X amount per year of lease.", "replies": [{"id": "g8u1d7y", "text": "I agree with this, OP. Alternately to a max amount, I\u2019ve also seen NNN leases with language that caps max percentage increases, year over year.\n\nThese expense percentage caps are calculated from a Base Year\u2014typically the first year of the lease.", "replies": [], "depth": 2}], "depth": 1}, {"id": "g8u2hgb", "text": "For office space - it depends on how much space you\u2019re taking (one floor or entire building) in my opinion. If it\u2019s the whole building it might make sense for the tenant to manage the building (maintenance, taxes and insurance).", "replies": [{"id": "g8ubzcy", "text": "It\u2019s like 800sq ft office unit out of a ginormous building. Maybe 50K sq ft building. One story in a business park. Nothing special. Just trying to learn what I should look out for.", "replies": [{"id": "g8v24v0", "text": "NNN's or Operating Expenses include property tax, property insurance, and common area maintenance (janitorial, landscaping, etc.) and is quoted on an annual $/SF basis. You will only be responsible for your pro rata share. \n\nIt's just a different way to skin the cat. If you were to pay $30.00 Full Service vs. $16.00 NNN + $14.00 OPEX, you're still paying the same price per square foot. The difference is with the Full Service lease, the landlord has already baked these operating expenses into the lease rate and you are essentially reimbursing the landlord (Full Service lease are still reconciled at the end of each year, typically in relation to the Base Year, or the year the lease commences), whereas with a NNN lease, these expenses are passed through directly to you as a tenant. \n\nGiven what Covid has done to office leasing (depending on the market) Tenant's have more leverage, as office leasing volume is down. \n\nAs others have said, negotiate for abated rent (maybe 1-2 months per year of lease term depending on the market), understand historical OPEX for the past 3-5 years, request a cap not to exceed 5% annum (non-cumulative and non-compounding if you can get it), and maybe a Tenant Improvement allowance that can be applied to rent if unneeded/unused. \n\nThe above of course is dependent on a number factors (building's vacancy rate, market activity, landlord, etc.)\n\nFinally and most importantly, hire a tenant rep broker. It costs you nothing and you will 100% get a better deal than negotiating against a landlord directly; especially if this is your first go.  \n\nI mostly represent landlords and still recommend tenants hire representation. It's better for all involved for a number of reasons.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "g8u2que", "text": "When you make an offer ask for a few months free or reduced rent on the front end. Landlords understand you need time to get moved in and up to speed.", "replies": [], "depth": 1}, {"id": "g8ues3t", "text": "Lease structures are highly regional. All office leases in your area may be NNN or maybe MG is more prevalent. If all are NNN in the market you are looking in, that is not going to be an easy thing to get a landlord to negotiate on.\n\nNNN is not a clearly defined term in commercial real estate. Different buildings that both call themselves NNN will vary in what the tenant is responsible for (building insurance? exterior maintenance? HVAC repair or maintenance? janitorial? utilities). Look at how your building decides these things and you can ask for a break out for what is included in CAM or OpEx charges. Check for previous years numbers to make sure they are pretty consistent. You will also be on the hook for taxes, so be aware that if the local government reassesses the building or otherwise increases the taxes, you will get your proportionate share of that tax bill as well and will be responsible for the increase.", "replies": [], "depth": 1}, {"id": "g8uke6a", "text": "Ask for history of what the charges have been to-date. Typically triple net leases are not for multi tenant commercial buildings.", "replies": [], "depth": 1}, {"id": "g8vcs06", "text": "Ask for a cap on controllable expenses to limit your exposure. \n\nProperty OpEx is divided into non controllable (taxes, insurance, and utilities) and controllable (everything else). Some NNN leases includes language that caps the year-over-year growth of the controllable expenses. So if R&amp;M expenses grows from $10,000 in year 1 to $20,000 in year 2 and you occupy 10% of the building, you\u2019re only responsible for $1,500 of R&amp;M in year 2.", "replies": [], "depth": 1}, {"id": "g8wpxx9", "text": "If you need project management service to build out your space - using the Landlord\u2019s tenant improvement allowance let me know. I work for a co-working company doing their interior fit outs.", "replies": [{"id": "g8x770x", "text": "Nice! We probably won't need that as we're a video production company and mostly looking for a shell of a room that we'd setup ourselves but thank you though!", "replies": [], "depth": 2}], "depth": 1}, {"id": "g9gfgzj", "text": "In a muti-tenant situation, you should dig your heels in to only pay for cap expenditures on an amortized basis following GAAP. \n\nEffectively, if the roof needs replacement (say its $300k to fix, and by the way, in the lease, it should state that replacement vs repair needs should be determined by a third party expert with three or more bids required for items over $50k) and you've leased 800 SF of 40k SF (you mention 50k SF, but some of that is common area), you'd be on the hook for $6,000 at the end of the year (800SF/40k SF \\* $300k).\n\nIf it's GAAP amortized, you're only responsible for yearly payments for the new roof over the course of its useful life while you're renting. Say it's an EPDM roof, so call it 20 year life span. Your yearly payment would be $300 (800/40k/20year\\*300k). If you never renewed, the landlord would not be able to collect from you. That's fair because you're paying for the roof while you're using it and not the next 20 years when who knows where you'll be. \n\nThe other option is to amortize the improvements over the remaining term of the tenant's lease. In this case, at least you're breaking up that $6,000 payment over a few years. \n\nAnother angle is to put a cap on the amount the landlord can bill for CapEx in a single calendar year and over the course of your entire lease. I'd also include language on what is excluded, for example, any environmental cleanup work, anything that could be deemed discretionary like landscaping improvements, and maybe parking lot replacement if the parking lot is ginormous and you only use two spots. \n\nIn general, you want a lease that disincentivizes the landlord from completing a whole bunch of CapEx quickly. If the landlord can bill back all Cap-Ex in a single year, they might load up the building with cheap naive tenants, complete a bunch of improvements, attempt to bill it back to the tenants, and sell a newly refurbished building (full of angry tenants) for a nice price. If reimbursements are amortized, the landlord would be passing that income stream off to the next owner. \n\nAnything, anything in the lease that states you are to pay the suppliers directly, run! This is a big hook with a nasty barb.  (FYI, this is normal in an absolute NNN lease, but anything muti-tenant, this would set up scenarios for abuse.)\n\nRead the lease carefully and don't hesitate to send it back with redlines. Contracts are business. I'd carefully read any section that includes the words \"reimbursement\", \" end of year\", or \"reconciliation\" (do a key word search if possible). If you find something genuinely unfair and they refuse to change it, could be a sign. Request a list of forecasted CapEx items and see what they offer.", "replies": [], "depth": 1}, {"id": "gf3lis3", "text": "NNN cost recoveries shouldn't cover things like major breakages/repairs, just routine CAM; however, have the landlord explicitly define CAM and its components for assurance and provide examples of major capital improvements. Being your first commercial space lease, I'd suggest you look into negotiating a base year stop if you are unsure about the CAM expenses.", "replies": [], "depth": 1}, {"id": "giqdk1d", "text": "As a landlord, I love triple net. As a tenant I wouldn\u2019t lol", "replies": [], "depth": 1}]