Triple Net Leases and How they Affect Your Business
Your warehouse is an important place. Where the home office is the thinking center of your operation, the warehouse is the doing center. If you don’t own your property, it is very likely that you have a net lease. This piece will define what a triple net lease is, how it can pose some challenges for you as a tenant, and why a mezzanine is a superior choice when you need to augment and optimize the space in your warehouse.
What is a triple net lease?
When one thinks of a commercial lease, they typically think of an arrangement where a tenant pays a landlord to use a property. The property owner has the responsibility to directly pay the property taxes, insurance, and for any maintenance to the property. While this has been the traditional way to allow a business to operate on a property without owning it, they are becoming more scarce, especially for long term leases. Commercial real estate owners have turned to net leases which transfer the responsibility for certain operational costs to the tenant. This allows the property owner the ability to offer lower rent since the operational expenses aren’t included.
The most common form of net lease is triple which means the tenant is responsible for paying three of the most significant costs associated with owning a commercial property: real estate taxes, insurance, and property and building maintenance.
How can it help or hinder expansion?
Lower rent is a great thing, but when your business is responsible for utilities, maintenance, property taxes, and insurance on a property, and those can be significant expenses. When your business needs more room to handle new business, it can be difficult to move to a new location. The expenses themselves pose interesting potential issues.
Property taxes – Depending on the location, property taxes can be a volatile expense as communities raise property taxes to pay for schools and infrastructure. Since the landlord is the property owner, they have the responsibility to contest a higher appraisal, which is what they would have done on their own if they were paying the tax. The property owner may not bother with contesting a higher appraisal, but they do so at the risk of losing a tenant at the end of the lease.
Building maintenance costs – A new building in good condition generally has fewer maintenance issues so this tends to be a minor issue. If the tenant causes any damage it’s understood that they are responsible for repairing it according to the terms of the lease. Older buildings may have more maintenance issues, and a tenant may not report damage or attend to common area maintenance. If, for example, the building needs to have the parking lot repaved, it will have to be absolutely clear in the lease how the expense will be handled, because if not, there is a high risk for miscommunication and misunderstanding.
Building insurance – As a tenant, you are responsible for not only the premiums but also the deductibles if something were to happen. Also, depending on the insurance company, they may prefer to negotiate with the property owner if there is a dispute, not the tenant.
Grow tall with a mezzanine, instead of adding more overhead
Mezzanine Distributors has a great solution for businesses looking to get the most out of their spaces, while also keeping expenditures low. Instead of moving to an additional building to accommodate more capacity, look up and use what you already have. Mezzanine Distributors can customize any design to fit your warehouse spaces. Best yet, an installed mezzanine is not a permanent structure meaning when your lease ends, the mezzanine is your asset to use how you wish which means it can be sold or brought to your new location and made to fit. Moving to a larger space increases overall rent, as well as property taxes, building maintenance, and insurance – the three costs associated with a triple net lease. When comparing these expenses, which recur every month, to a mezzanine, which is a fixed cost, you can easily see how quickly a mezzanine would pay for itself.