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.

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 While Jim had managed the facility for years, backup power was never a priority for the previous owners. The plant was already operating at maximum capacity, so they couldn’t make up for lost time with additional shifts. Regardless of what happens with this storm, Jim knows he needs a better plan to deal with any type of future power outage.

 Jim’s situation is very common. Many businesses think of backup power as an all-or-nothing scenario. Permanently installed generators are cost prohibitive so they settle for nothing instead.   Today, facility managers and building owners have more choices, providing them with the reassurance of having backup power at a fraction of the cost.

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