Triple Net Lease Tax Benefits
Triple Net Lease Tax Benefits
In a business lease, known as a triple net lease, the tenant is more fully accountable for everything. They cover all or a portion of the property’s taxes, insurance, and upkeep costs. In addition to the tenant’s monthly rent, these costs must be paid. An NNN lease is another name for this kind of arrangement.
Contrary to conventional real estate leases, triple-net leases provide various benefits.
Features of Triple Net Lease
To lease commercial real estate properly, you must determine your business needs. Here are the main factors.
Location of the building
This factor’s importance for business development depends on the company’s direction and the purpose of the triple net lease (for a store, office, workshop, warehouse, or showroom). Production and warehouse space is better to rent in areas with highways. The profitability of stores, salons, and service facilities directly affect customer traffic.
Therefore, it is better to select objects in areas with high population density. It is better to rent offices in places with good transport accessibility, not far from metro stations. In this respect, non-residential premises in industrial, commercial, administrative and warehouse buildings are in the highest demand.
Rental price
When choosing a space, it is necessary to compare the planned income and expenses on its rent.
Floor plan and square footage
If your business needs specific property parameters, pay attention to the possibility of rearrangement when searching for it.
The quality and condition of the space
The retail property on the first floor of a luxury building and a similar space in a typical new building have significant differences. Similarly, a Class A or B office is different from a Class C office.
The office’s prestige is the company’s image and reputation, so reliable tenants are unlikely to pay attention to an old building with old engineering systems and inconvenient room layouts. At the same time, a small office, located in a solid business center, will be much more in demand.
Infrastructure
Many activities require modern communications. Therefore, when choosing an object necessary to specify whether the building has electricity, heating, sewerage, plumbing, ventilation, whether air conditioning systems are installed, and whether there is telephone communication and Internet access.
In addition, the facility should have convenient parking if you are looking for space for a store or showroom, staff accommodation, customer reception, or business meetings.
Ensuring security
This is important if the business is associated with inventory production, storage and sale. In addition, several premises owners offer tenants security services and video surveillance.
Competitive environment
Assessing the competitive environment is necessary to predict future rental income. This may be the most challenging and time-consuming point. However, if the premises have a specific purpose – store, hairdresser, beauty salon – it simplifies things, as you will be able to analyze if there are many competitors around and the advantages and disadvantages of your premises.
Who are the potential tenants of office real estate? Again, specialized portals come to the rescue, with the help of which you can look at what business centers are in the area, the dynamics of rental rates, and whether tenants change frequently.
Additional services
In the company’s work, it is often required to place an advertisement, signboards, and signposts on the territory of the rented object. Sometimes, the tenant must register his company at the location. Therefore, discussing these questions with the owner when choosing the premises is necessary.
Each business and market segment has its requirements. The most important thing is the possibility of doing business on the premises. If it’s trading, there must be customer traffic. If you need space for offices, you need good transport interchange, so it’s easy to find employees and customers.
If a warehouse, proximity to federal highways and the appropriate condition of the premises. For a firm engaged in trade, the most successful will be the choice of real estate located on crowded streets.
It is also essential to consider the following criteria:
Availability of convenient access roads.
Whether the property to be selected is located near a roadway or parking lot.
Regarding the infrastructure of the building, experts advise choosing an empty room because it creates the opportunity to develop a unique interior layout and style that will fit the concept of your company. For opening an office of a company providing various services to the population, the best option may be a triple net lease of fully ready-for-work office space in a large business complex or center with finished ceilings and walls.
The manufacturing warehouse is best rented on the outskirts of the city. In such cases, brokers usually offer premises already in use. Therefore, they already have all the necessary conditions: sewage, heating, and security.
An essential factor in this for tenants is the right to use the leased space and the land on which the property is located for the entire lease term. This clause is valid even when this land plot is not the lessor’s property, but only under this critical condition that this action does not contradict the existing agreement or the law.
Lease terms: How to draw up an agreement correctly
Study the contract and all documents carefully, preferably with your lawyer. Be sure to request a statement for the property (for the arrest of the property, pledge of the property, etc.). It is essential to understand whether the person named in the contract is the owner of the premises and whether there are no co-owners.
If there are, they should be specified in the contract or have a power of attorney to lease. Also, please pay attention to an apt description of the subject of the contract (i.e. address, technical characteristics, based on what documents it belongs to the owner).
Another point is that the contract should specify the fixed part (rent for the premises) and the variable region (utilities). It so happens that the landlord pays the utilities, and it so happens that the tenant does.
A serious risk is a frequent and unreasonable increase in rent. To avoid this, it is necessary to stipulate the possible percentage increase and the procedure for changing the rent in the contract. In addition, the agreement must specify detachable and inseparable improvements.
The former are improvements that the tenant can take with them at the end of the lease. So, for example, you can’t take away capital partitions built by the tenant, but you can take away temporary ones.
Or, let’s say the wall paint remains, but the air conditioner installed can easily be removed. Therefore, it is necessary to spell out – whether the improvements stay with the owner and on what terms. If you spend your own money on repairs, try to lay down penalties in case of early termination. Also, please write in the contract what period you must be notified about it.
Registration of Documents
Thus, the decision is made. Next, it is a matter of documents. First, request the draft agreement and the records of the title. Here are the documents you should get from the landlord as a physical person: your passport and the wife’s notarized consent for the lease (if the property was acquired during the marriage).
Documents that should be required from the legal entity: the charter, memorandum of association, certificate of registration of a legal entity, and certificate of cadastral registration. Documents confirming the director’s authority, including notarial consent of the spouse (a) of the founders to rent (if the object was acquired during the marriage), documents of title to the thing. The most important part of this transaction stage is the technical documentation for the object (whether its layout corresponds to reality).
And what should the tenant prepare himself? The documents of the legal entity leasing the non-residential premises: the certificate of registration of the legal entity, certification of the record of the legal entity, and certificate of registration with the tax authority. As well as the charter, amendments to the alliance (if any), the memorandum of association (if any), the document confirming the powers of the director (an extract from the protocol (decision) on the appointment of the director), the employment agreement (contract) with the director.
Critical advantages of triple net leases
Extremely long lease terms
Triple Net Lease agreements typically have an initial lease term of 15-20 years, with multiple 5-year renewal options.
Automatic rent increases
Each year, the rent usually increases by 2%, which is already agreed upon in advance when the lease is signed.
No landlord liability
This means the tenant is responsible for paying all property costs, including utilities, triple net lease tax benefits, insurance and even maintenance.
Strong tenants
The most common tenants are grocery stores, convenience stores, fast food restaurants, pharmacies, gas stations, etc., and other recession-resistant and e-commerce businesses. Rent coverage ratios are typically 2-3x, and therefore there is a reasonable margin of safety even if business conditions deteriorate.
Conclusion
Triple net leases almost always favor the landlord and should be discussed carefully to limit how much the landlord can increase NNN fees yearly. You will also want to make sure that these fees and conditions for increases are clearly stated in your lease. If you make a mistake, you may run into it for some time because triple net leases typically last 10 to 15 years.
Beware of terms like “turnkey” in lease negotiations. This often means that the lease is a triple net. If you need more clarification, contact a real estate attorney.
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