Five Costly Mistakes for Net Lease Owners to Avoid
- Sep 17, 2014
By Rich Murphy, Managing Director of Asset Management, and Winston Orzechowski, Research Director, Calkain Cos.
The idea of managing a triple-net lease property probably doesn’t make sense to a lot of real estate investors. After all, the tenant has 100 percent responsibility for the maintenance of the property, and the owner simply receives a check on the first of the month, right?
Management-free ownership may be the case for many triple-net lease properties, but in some situations the fine print of the lease will add a few caveats that the inattentive landlord can stumble over if they are not careful. When confronted with such a lease, an owner needs to be aware of the issues that can hinder their ability to collect the full NOI that is due.
The following list outlines a few of the common mistakes that triple-net lease owners must avoid if they hope to realize the greatest possible yield from their investment.
1. Always keep copies of receipts for expenses that the tenant will reimburse.
In many cases, the tenant can require copies of receipts as a condition for reimbursement of the reported expenses. Poor organization and missing receipts may keep owners from reimbursements that are rightfully theirs.
2. Make sure to have relevant dates marked on your calendar – certain reimbursements may not be enforceable after a specified period of time has passed.
Even if an owner has kept careful record of expenses, the lease may specify that a tenant is no longer liable for reimbursements if the owner has not delivered a bill or reconciliation statement after a certain number of days. Additionally, late fees incurred by the owner’s tardiness in paying bills cannot be passed along to the tenant.
3. Be aware of the difference between a “true” triple-net lease and one that gives the landlord responsibility for the roof and structure of the property.
Many leases that are considered triple net will actually direct that the landlord is responsible for expenses relating to the roof and structure of the property. Such expenses, though not ongoing issues, can be costly, and an owner should budget an adequate allowance to cover these bills when they occur.
4. Remember that expense reductions may not put instant money in the triple-net lease owner’s pocket, but could be a factor in a tenant’s decision to stay or go.
Triple-net lease owners may feel little incentive to make an effort to reduce expenses such as property tax bills or insurance premiums, as these payments will be passed along to the tenant, anyway. Such efforts may prove to be highly rewarding, though, as when a happy tenant makes the decision to sign for a new long-term lease, versus a dissatisfied tenant that leaves the landlord with a totally vacant property.
5. Keep in mind that while insurance premiums are reimbursable, obtaining the insurance policy may be a landlord responsibility.
An owner must make sure that they are aware of expiring insurance policies and must remember that renewing the policy is not part of the tenant’s duty. Needless to say, a property that is left uninsured is a huge liability for the landlord, and if there is a loan on the property, the lender may try to place an overpriced policy on the property themselves