The hidden cost of a triple net lease

  • By Josh Morphew
  • 03 Apr, 2017

Triple net leases are often used by property owners. This type of lease specifies that the tenant is responsible for maintenance and that the owner of the property is responsible for capital improvements. This sounds like a reasonable approach to take, so what could go wrong?

HVAC maintenance is usually one of the problem areas. The lease stipulates that the tenant is responsible for HVAC maintenance. If the relevant property is a retail property, the tenant obviously wants to provide a comfortable experience for their customers.

 

What most leases fail to specify is the type of maintenance the tenant is required to provide. As a result, tenants will normally opt for the least cost or minimum level of maintenance to keep the HVAC working. After all, they are just renting the place.

Here are some of the hidden costs related to HVAC maintenance 

·        Increased capital outlay:

If an air conditioning unit breaks down, for example, the HVAC technician could discover there has been a refrigerant leak and that has caused damage to the compressor. The tenant’s train of thought could realistically be something along the lines of: “this has been a tough month… I’ve only 4 months left on my lease, what is the minimum you can do to get it running again?”

 

For the sake of argument, let’s also pretend it is late August, so the tenant has about 2 months of air conditioning needs before cooler weather sets in. So, the unit will be idle until a new tenant leases the space. Flash forward to the following June and the daily temperature is averaging in the upper 90’s and the air conditioning unit fails.

 

This time the technician says the compressor is shot and there is additional damage requiring a new unit.  The new tenant is relieved because this now qualifies as a capital expense and falls upon the owner. The a/c unit that was supposed to last 15 years ends up being replaced in year 6 instead. This really ramps up the costs.

 

·        Paying more in utility costs:

Chances are that if the a/c unit wasn’t performing at optimal levels, the prior tenant was likely paying more in utility costs than necessary.

Including preventative HVAC maintenance in your 

If that scenario sounds too familiar, here’s an alternative:

 

We mentioned that most leases stipulate that tenants are responsible for HVAC maintenance but often don’t specify what type of maintenance. The owner could require ongoing preventative maintenance in the lease. Here are the most common preventative maintenance services available:

 

·         Low end

the service provider does periodic checks of the equipment including basic diagnostics and then provides the tenant with a list of recommended or needed repairs or expendable items.

 

·        Labor only

The tenant buys all equipment and the service company charges a flat rate for a full year of labor.

 

·        True preventative HVAC maintenance

 This varies by the contractor. However, the services typically include diagnostics, tune-ups, and repairs up to a certain level. The tenant is billed a flat monthly rate and thus avoids surprises.

·        Full coverage

Most contractors will fix everything including the compressor. This type of plan put pressure on the contractor to keep the equipment well maintained so that they are not exposed to large capital outlays.

 

·        Performance-based contracts

These are rare but have some application in industries like data centers where it is critical to maintaining a consistent environment.

 

There are a number of benefits involved with taking a preventative maintenance approach to your lease. Owners will know that equipment is being maintained, extending the life of the equipment. Tenants benefit from equipment that performs at optimal levels, helping to keep utility costs in check. Tenants are also able to budget for maintenance knowing it is a flat monthly rate vs. an unanticipated surprise. Tenant satisfaction will increase because breakdowns are prevented or minimized.

 

A few things to keep in mind, however, is that it may make sense to have the contractor specify how they will deal with obsolescence like a circuit board that is no longer available (especially if the property is relatively old). The other major repair item that tends to get ugly with triple net leases is roofing repair. So, it may make sense to include roofing maintenance in leases.

 

Baxter Commercial Services offers a range of HVAC, air conditioning and cooling repairs and installations. Contact us for more information about how we can help you keep your property in top condition all year round.

By Josh Morphew 29 Jun, 2017

  • Most refrigeration equipment operating on R-22 is likely many years old. Compare the age to the life expectancy of the equipment.
  • Is the unit still under warranty? If so, what type of repairs does the warranty cover?
  •  Review maintenance logs to determine the service vs. repair history of this equipment. How often has it required service?
  • What is the nature of the current problem? How significant is it?
  • A typical 25-ton commercially packaged unit will require about 25 to 30 pounds of refrigerant. If there is a leak, the entire system will need to be drained before testing can be done to isolate the leak. Those two steps alone may cost $1,000 or more. 
  • How much refrigerant has already been lost?

  • If the leak can be repaired, what is the cost of the repair and the cost to replace the refrigerant? The price of R-22 is subject to supply and demand. Prices have been steadily increasing with little to no new R-22 production.
  • It is not uncommon to see service/repair calls increase with equipment that is beyond the midpoint of its expected lifespan. If your unit needs too many services and repairs, it may be more economical to replace the unit.
  • You can no longer replace just a compressor or evaporator. Components manufactured today are designed for newer refrigerants and are not compatible with R-22.

By Josh Morphew 19 Jun, 2017

As a facility or building manager, you face numerous decisions daily. Some of those may involve repair or replacement decisions for air conditioning or refrigeration equipment. Cooling technology is evolving to meet environmental standards and these changes could impact your decisions. In this article, we will discuss changes in refrigerant technology and their implications to daily operations.

By Josh Morphew 19 Jun, 2017

For many businesses, backup generators serve a critical need. If they fail to perform when needed most, it can have a significant detrimental impact on business functions. Consider the critical nature of a backup generator at a hospital where a surgeon operates on patients or a call center with 1,000 agents waiting to close deals. One is life-and-death and the other could be if the call center is a 911 helpline.

 

Facility managers are often the people responsible for the proper care and maintenance of backup generators. After years of installing and servicing generators, our team of electrical contractors has identified a list of reasons why backup generators fail as well as a guide on what can be done to prevent these failures. This is not an exhaustive list, but it does represent the most common problems throughout the facilities that we service:

By Josh Morphew 12 Jun, 2017

Electronics are vulnerable to electrical spikes: surges in voltage that occur for several reasons such as:

·        a power line or phone line being struck by lightning,

·        utility power being restored after an outage,

·        utility services being interrupted from construction,

·        an accident or a fire, and/or

·        high winds that cause power lines to cross and acr.

 

Even seemingly small occurrences, such as normal motor or compressor cycles within a facility, can render small but damaging fluctuations to electronics.

By Josh Morphew 05 Jun, 2017
This particular case study covers how commercial lighting solutions helped Yukon Public Schools to save 400,000+ kWh annually by retrofitting their lighting and participating in the 2013 OG&E’s Schools and Government Efficiency Program. Four Yukon Public Schools were retrofitted with lighting and 70% of the total project costs were covered by OG&E incentives. Several schools in Oklahoma have been able to afford lighting retrofit projects thanks to the OG&E incentive program.   At a time when every educational dollar counts, a program like this can potentially put money back into a school district’s budget.
By Josh Morphew 29 May, 2017

When commercial HVAC systems breakdown, it can be a huge negative impact on the business. We have found that preventative maintenance can assist in reducing or even eliminating the risk of breakdowns and failures. Below is a case study to illustrate.

In mid 2013, Baxter Commercial Services was approached by a client who owned and managed a retail shopping center with 20 individual units. The problem was that the HVAC systems were frequently breaking down.

This caused several problems including lost retail revenue, ongoing costly repairs, angry tenants and lease renewal implications. The landlord wanted to discuss preventative maintenance programs as the breakdowns were becoming far too frequent and costly.

Following the discussion, Baxter Commercial Services technicians performed complete diagnostics and inspections of all 20 units. The team discovered clogged coils and filters on many units and other signs of little to no maintenance had been performed on units. The experts further advised landlord that some units were older and the lack of maintenance had cumulative impact that would likely result in the need to replace several units during the year.

It was also advised that after the  initial round of maintenance, ongoing maintenance would be performed every six months. During the first year, 5 older HVAC units failed and were replaced.


Once Baxter Commercial Services was in charge of the HVAC system upkeep, consistent maintenance was performed every 6 months over the following 3 years.  During this period, there we no unit failures nor breakdowns.   The before and after contrast was significant. The landlord avoided costly repairs and could either re-invest those dollars into other projects or increase the operational profit margin.

Moreover, the landlord said that tenants reported lower utility bills and were happier in general resulting in a higher percentage of lease renewals.

By Josh Morphew 15 May, 2017

Ever notice that the light bulb section in your local hardware store is getting bigger and the choices are getting more complicated? Bulb size, wattage, base type, dimmable or not, color temperature and more are all decision points today. Not to mention price. If you have ever come home with the wrong light bulb, you have plenty of company. For commercial lighting applications, multiply the difficulty level several times.

 

A simple looking ceiling fixture may not be as simple as it looks. Historically, commercial buildings have used fluorescent lighting for office areas and a combination of other fixtures for warehouse and even parking garage lighting . Many businesses are converting both types of lighting to LED lighting for energy efficiency, reduced maintenance, and improved light coverage. Converting from fluorescent to LED may be as easy as swapping out one light bulb for another, but, given all the nuances of commercial lighting fixtures, spending some extra time researching and planning will save time and headaches in the end.

To make a comparison, with automobiles, some parts like wind shield wipers are interchangeable between vehicle brands and models, while other parts are very vehicle specific. The same concept applies to commercial lighting fixtures. To add a level of complexity, if portions of a commercial building were built at different times, light fixtures may appear to be the same, but, can actually be different.

By Josh Morphew 01 May, 2017

The enactment of the Montreal Protocol came with implications for owners, equipment operators, and managers of commercial buildings.  The international environmental agreement requires nations and states to phase out all the refrigeration and air conditioning systems , that uses the R-22 refrigerant, a commercially-produced hydrochloroflourocarbon (HCFC-22). This substance is listed among the most notorious ozone depleting substances. It was expected that by 1st January 2015, all the existing refrigerators running on the fluid, would be phased out. However, some companies and individuals are yet to do so.

By Josh Morphew 24 Apr, 2017

Simply defined, smart lighting is lighting technology designed for energy efficiency. This can include everything from the light bulbs to light fixtures, to switches or electronic controls that adjust lighting automatically.

By Josh Morphew 17 Apr, 2017

When systems fail or equipment breaks, there are often far-reaching implications. For a manufacturer, it could mean that a production line is shut down. A restaurant may not be able to prepare food. Or a senior living center may have to make provision for patients that are sensitive to temperature swings.

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