Is NNN A Good Investment?
Is NNN a good investment?
The practice of entering into so-called triple net leases (i.e., institutional leases) is common in today’s office, retail, and warehouse leasing markets. In such agreements, tenants pay a service charge in addition to the base rent.
Maintenance fees include certain fees, costs, and taxes calculated in connection with the maintenance of the entire building in which the rental unit is located (e.g., common area cleaning, snow removal, trash removal, elevator maintenance, property manager fees, property tax costs, perpetual occupancy fees, and property insurance).
Total maintenance fees are calculated annually based on the ratio of the total costs and expenses associated with maintaining the entire building to the square footage of the rental property (including the gross floor area factor — the so-called add-on factor).
These fees are paid as a monthly advance payment (usually along with the rent). Like rent, it is usually calculated per square meter of rented space.
NNN leases are widespread in the USA. As a result, there is uncertainty about the significance and effectiveness of this type of contract. However, as more and more international companies are renting space on the one hand, and the investment market is becoming more global on the other hand, NNN leases are also on the rise in this country.
If you transfer all fluctuating costs to the tenant, the investor could reasonably calculate his return and keep administrative and cost expenditure low. Do not underestimate the advantage, especially since the return requirements of many funds and insurance companies are expected to become increasingly calculable. So, is NNN a good investment?
The Advantages of the Triple Lease
For such a rental contract to be legally permissible, it must not be concluded as a form rental agreement subject to the law on general terms and conditions (AGB). Instead, it must be fixed as an individual agreement. It is the main reason NNN leases have led to a niche existence so far.
As the name suggests, it gives the landlord “net” agreements at three points.
The letter represents the tenant’s most far-reaching and risky agreement in economic terms. Particularly in the case of agreements with more extended periods, possible costs on the roof, and framework.
While it is customary and permissible to transfer expenses for cosmetic fixes and attendance obligations for the leased premises to the commercial occupant, the area of roofs and sheds is usually the landlord’s responsibility. According to supreme court rulings, their unlimited transfer is not permissible in the case of a form of rental agreement drawn up by the landlord.
Errors In The Rental Arrangement The Landlord Bore
An individual contract negotiated between the landlord and tenant is required. The landlord bears errors. The contractual clauses must be individually available for negotiation, which the landlord must demonstrate and prove in a dispute To meet the strict requirements for separate agreements. In particular, it must be comprehensible that the tenant receives a discount on his rent in return for assuming the variable costs.
A rental survey or a professional overview of market rents should serve as the basis for discounts. Archive the negotiated clause variants with the correspondence for future reference.
It can also be helpful to offer a choice of different clauses (e.g., triple net or standard cost allocation) in the lease agreement. In this way, the tenant had a choice.
List of Operating Costs
When transferring operating costs, observe the limits of the permissibility of form contracts. Individual types of expenses must be listed. The agreement’s text may not state in general terms that “the tenant shall bear all expenses.” When passing on insurance spending, apartment owners and occupants may transfer the standard insurance policies such as natural hazard, building liability, and particular additional policies.
However, these must benefit the tenant. These include, for example, glass and terrorism insurance or insurance for damage to telecommunications, alarm, and fire systems. If there is a deviation, you have to find an individual contractual provision.
Consider other things and include them in the NNN contract, which is attractive and acceptable to a tenant. In a situation when an occupant needs documentation of the building’s services, heating, etc.
This form of lease, for example, for space in modern high-rise commercial buildings, may offer some surprises for those who are used to more known leases. These costs are billed early and allocated to loggers on a pro-rata basis. The tenant makes monthly advance payments on these.
Lawyers design such lease agreements so that the logger initially pays rent that covers basics. There you see a net amount per square meter.
The advertising field specialists usually use this rent, and many prospective tenants mistakenly compare it with a “rent per square meter.” They then sometimes think they are looking at a “bargain.”
However, it is essential to note that both the basic rent and the cost allocation are not only payable for the rented pure floor space and any ancillary areas (e.g., office space and archive rooms).
Furthermore, there are leases in which, to the pure, usable space, “floor space,” i.e., area from the connecting corridors outside the actual leased rooms, is also included in the rental space calculation. In this case, the square meter figure of the pure, usable space is increased by a partial floor space area.
What Nuances Should The Tenant Observe?
Such lease form, for example, for space in modern high-rise commercial buildings, may offer some surprises for those who are used to more traditional commercial leases. These are peculiar operating and administrative spending (in the broadest sense) that they fulfill. These costs are billed annually and allocated to tenants on a pro-rata basis. The tenant makes advance payments each month.
Technical Due Diligence In Advance
Suppose the tenant wants to sign a Triple contract. In that case, he should carry out technical due diligence in advance to analyze the condition of the building and estimate expenses that might arise during his rental period. The rule here is that this cost risk is lower in the case of a new-build first-time tenant.
NNN agreements also only make sense if the tenant uses the entire space. Otherwise, there will probably be disputes with other loggers. Finally, the occupant should ask himself whether he has the professional know-how to manage a property. It is the shortest solution to check all the above options before making up your mind and applying for an agreement.
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