Is a Triple Net Lease Good for Your St. Louis Industrial Space, Too?
Whether you’re a tenant or a landlord, a triple net lease has both advantages and drawbacks. This lease structure shifts the cost of the building’s operating expenses to the tenant. It also gives the tenant a lot of control over how it cares for its St. Louis industrial space — and for the building as a whole.
Triple Net Basics
Technically speaking, a triple net lease is net of three things — taxes, insurance, and maintenance. In effect, it means that the tenant pays for all of the building’s operating expenses. All that the landlord pays for is his debt service, capital improvements, and the cost of re-tenanting spaces. As long as the building stays full, the tenants cover all of the expenses. Triple net rents are usually quoted in two parts. The base rent is what the tenant pays the landlord to occupy the building, while CAM, or common area maintenance, charges include all of the building’s operating expenses. Depending on how the building is managed, CAMs could be directly billed to the tenant by vendors or paid to the landlord and then disbursed.
A Tenant’s Perspective
A triple net structure has three key benefits for a tenant. First, the base rent is much lower than it would be in a building that is gross-leased. In some cases, your rent plus CAM is still lower than a gross lease may be elsewhere. Second, a triple net lease lets you get the benefit of cost savings. If you can run your St. Louis industrial space more efficiently, rebid vendor contracts, or convince your employees to clean up after themselves, you’ll realize the savings through lower CAM charges. Finally, paying the bills for your space frequently gives you more power over how it gets maintained. The more control you have, the more you can tailor it to your business’ specific needs.
A triple net lease carries one large drawback for you as a tenant, though. You will assume all of the risks of the building. If property taxes spike, you’ll have to pay for it. Should electricity or gas rates go up, you’ll be billed for them, and if your space needs serious repairs, they’ll be billed to you as well. Furthermore, it’s wise to talk to your company’s accountant, since, while most occupancy costs are deductible, some might not be. This can be a significant concern if you’re making major repairs to your industrial space in St. Louis, since the IRS is in the process of reclassifying many repairs that were considered operating expenses into capital improvements that need to be depreciated.
A Landlord’s Perspective
For landlords, the pros and cons of triple net lease structures get flipped. The key benefit is that you get sheltered from the costs of owning and operating your building. To a large extent, going triple net removes many of the real estate risks from your portfolio, although tenancy and vacancy risk remains. As long as you can stay full, using a triple net lease with your tenants smooths out your cashflow, making your properties work more like fixed-income investments.
However, when you give up responsibility, you also give up control. If you don’t write clauses into your leases that require your tenants to maintain your building to your standards, you could end up being victimized by a tenant’s bad management of your property. At that point, you’ll either have to sue to recover the cost of the damage, or absorb the cost yourself.
The triple net lease is popular with landlords and tenants because it solves problems for both parties. Ultimately, landlords get financial stability while tenants get control over their industrial St. Louis space. If you have any questions about a triple net lease, give us a call at Clark Properties.