The Triple Net Lease in Commercial Real Estate
The Tenant Pays Expenses in Addition to Rent
The triple net lease is used extensively in commercial real estate. It is popular for multi-tenant industrial and retail properties. With tenants whose expenses vary greatly, such as an industrial user of electricity, the triple net lease is best for the landlord. In the triple net lease, many of the expenses of operating the property are passed along to the tenant.
The landlord gets the advantage of not having to foot the bill for tenants who are wasteful of utilities or rough on their spaces, requiring more maintenance and repairs.
The tenants must be more careful and watch their expenses. In older and less efficient structures, the tenants are footing ongoing expenses that are higher because the building hasn't been renovated and needs some work.
Tenants are resistant to triple net leases, as they have no control over increases in expenses and budgeting their costs is more difficult. This is especially true when it comes to repairs and maintenance. In a triple net lease, the tenants would be responsible for sharing the cost of roof replacement. This can be a large and many times unexpected expense.
Of course, fixed rent is lower with the triple net lease. If the building is a newer one, tenants may find the triple net to be preferable to other choices. If establishing a new business, the triple net tenant in a new building can enjoy lower rent and expenses in their first few years. Once established, they may have grown to the point that larger space is necessary.
The move can be to a different type of lease or another newer facility.
Commercial real estate as a real estate practice niche is more complex but done right it can be a much higher income niche. First, there are so many different uses for the commercial property. To succeed, the commercial agent must learn a lot about the various business types and what they look for in a rental home for their business.
From retail, through offices to industrial space, each business type has unique requirements and property evaluation criteria.
Whether representing the building owner or the prospective tenant, the agent should understand a bit about the business, what they seek, and if and how the property meets their needs. In retail, it's location and related traffic of customers. Does the tenant need a lot of window space for display or not? Is a lot of traffic already walking in the area, such as in a mall, or is the building more of a drive-to destination?
For other types of specialty businesses such as gas stations and oil change companies, there are other considerations, especially the disposal or storage of oil and possibly other hazardous materials. Auto repair shops also fall into this group. Knowing what their business needs to be efficient and comply with laws is of value.
Office buildings are a bit simpler, but there are still some important differences in business types and what they need in their units. Lawyers, accountants, and consultants pretty much need normal office space with normal utility needs and maybe shared conference room or other services. They do need parking for their clients, but most offices do as well.
Medical and dental offices have much more specialized needs due to the equipment they use. From X-Ray to chiropractic appliances, these offices use more electricity and may need different outlets and voltages. They also want small individual private treatment rooms, so their spaces are subdivided more than other types of businesses.
Real estate professionals considering moving to the commercial niche should do so carefully, as you may not get that first commission for up to a year or more. It's not like residential. There are fewer transactions, but they are larger. You might want to see if you can part time apprentice with a successful commercial agent willing to share a commission for your help. It won't be a big share, but it could be enough to keep you going as you begin to build your own business and prospect base.
Don't let this scare you, as commercial commissions are really great once you get them rolling, and the triple net lease in commercial real estate can be a great niche.