Many commercial property owners, especially of older properties, pay for many of the operating expenses associated with the property. The tenants may pay utilities, or some taxes and insurance, but for the most part, the owner is responsible for paying these operating expenses.
Too often, the commercial properties that produce income, such as apartments, office complexes, retail centers, and strip malls are not maximized to their full potential! This is because of leasing structures and the difference between what the owner and tenant are responsible for.
It used to be common for the owner to pay the property's taxes, insurance, and utilities under a full service lease. The tenant would simply pay the rent every month, and the owner would pay the bills. This greatly cut into overall profits, as the owner was using rent income to pay the additional bills.
Savvy commercial property owners and investors soon came to realize that if the tenants are using the property, they should have to pay for the expenses of keeping it in operation. After all, who is using the water, electricity, trash services and common areas? Not the owner, but the tenant.
Net leases became popular, instead of the full service lease, which required the lessee to pay only the taxes and insurance. The lessor would be responsible for utilities and other related operating expenses. This change in lease structure allowed more profit to stay in the hands of the owner.
Even still, owners took the lease structure one step further. In recent years, and even recent months, both young and old properties are being changed to net-net-net leases, or the triple net lease, where the lessee (tenant) is responsible for paying three of the most important operating expenses: taxes, insurance, and utilities. A true triple net lease is one in which the lessee pays all of the operating expenses, and the lessor simply receives a rent check every month.
This structure of leasing has become very popular, and many commercial properties are making the switch because it greatly decreases the overall expenses, net operating income, and make the property higher performing and extremely more valuable. The lessors may not be happy, as they are now required to pay for the entire property, as opposed to just their living space.
So how does the lessor know how much each lessee must pay? Besides separating the utilities and having each unit's tenant be responsible for that which he or she uses, the common expenses are divided among all the units according to the total square footage of living space. The larger the unit leased, the more they pay.
If you are looking to increase the return on your property, and are currently not employing a triple net lease, you should look into getting the contracts changed. You will immediately see how much money you can keep in your hands when the tenants are paying for all common area maintenance which may include parking lot cleaning, parking lot's electric, the lawn care, pool maintenance, and all other utilities used by the project.
You will look forward to collecting your rental checks every month, and not watch them pass through your hands, only to go to those who supply services that only your tenants use.
Your tenants may not be happy at first, but the cost is dramatically less when spread among every tenant in the building and their specific living area. The risk of transferring to this triple net lease is definitely worth the risk, especially when many commercial property owners are making the switch. |
