About Triple-Net Leases

A triple-net lease, also referred to as a net-net-net lease and NNN lease, is a lease agreement where the lessee (a single tenant) is responsible for paying the lessor (landlord) on a net-net-net basis for the following:

  1. real estate taxes;
  2. insurance; and
  3. property maintenance.

This type of lease assigns building maintenance and repair responsibilities to the lessee, such as roof repairs, air conditioner replacement, and parking area maintenance. Technically, the lessor owns the building and land but assigns other expenses, in addition to the basic rent, to the lessee.

Additional Types of Leases

  1. A single-net lease is a lease agreement where the lessee is responsible for paying property tax in addition to basic rent.
  2. A double-net lease, also referred to as net-net or NN lease, is a lease agreement where the lessee is responsible for almost all expenses, including taxes, insurance, and basic rent, but not for certain property maintenance items.
  3. A ground lease is a lease agreement where a property owner owns the land and a lessee can develop it. The expenses assigned to the lessee in an NNN lease are the same for this type, too.
  4. A gross lease is a lease agreement where the lessor is responsible for most expenses associated with the property, including taxes, insurance, and maintenance.

It’s important for a commercial inspector to be familiar with the different types of commercial leases to better understand and serve the client’s needs.

About Triple-Net Lease Inspections

A triple-net lease inspection, also referred to as triple-NET or NNN lease inspection, is a type of inspection that is performed for a triple-net lease real estate transaction. It should be performed for both the lessor and lessee and can occur pre-lease, during the term of the lease, or post-lease. It’s more common for this type of inspection to be performed on older properties and for long-term leases. The most common types of buildings for this kind of transaction include retail, office, and industrial, and generally the term of the lease is at least five years.

 

Pre-Lease Inspection

A pre-lease inspection should be performed for both the lessor and lessee. The lessor might order an inspection to procure documentation about the condition of the property before leasing it out. Although the lessor will not be responsible for the maintenance or repair of the property’s systems and components, documentation can be used as protection if a claim is filed by the tenant. Oftentimes, the lessor will own more than one property and, therefore, repeat business can occur if the client is impressed with your service.

The lessee will typically order a standard inspection to determine the general condition of the property. Also, since this type of client is responsible for the cost of maintenance and repairs for the building, they will likely want the inspector to determine if there will be any big-ticket repairs or replacements in the foreseeable future. This may require providing life expectancies and repair/replacement cost estimates. Hire consultants as needed.

 

Research

Whether your client is the lessee or lessor in the transaction, ask your client the following questions either during your initial conversation about the project, or during the scheduled research portion of the inspection:

  1. What are the inclusions for property maintenance in the lease?
  2. What are the exclusions for property maintenance in the lease?
  3. Are any major improvements planned for the property? This could also be referenced as renovations, build-outs, or lease-hold improvements.
  4. What is the term of the lease?
  5. Is this a single-tenant or multi-tenant triple-net lease? The property owner will typically collect a standard fee and perform maintenance on common areas under a multit-tenant triple-net lease.

These questions will provide insight on inspection items of interest and the type of consultants to hire. Additionally, the term of the lease will tell the inspector the period of time to consider in terms of foreseeable maintenance or repairs. Record any inspection items of interest outside of the ComSOP in the Scope of Work Agreement.

Additionally, collecting and reviewing the following documents is especially important for a triple-net lease inspection:

  1. a copy of the lease;
  2. maintenance contracts;
  3. maintenance records;
  4. manufacturers’ installation instructions;
  5. manufacturers’ warranties;
  6. repair or modification history;
  7. environmental studies; and
  8. building improvement plans.

 

During the Lease Inspection

An inspection performed during the term of a lease is generally ordered by the tenant, but it can be a requirement in the rental agreement set forth by the landlord. For instance, the landlord may require the tenant to have a visual inspection performed every quarter to ensure that proper maintenance is completed, rather than being put off until the end of the rental agreement, which can result in a higher cost to remedy for the building owner, which could have been avoided.

Depending on the client’s objective for ordering an inspection, there are a few common approaches:

  1. Standard Commercial Inspection. This type of inspection is performed in accordance with the ComSOP and should be completed at least every few years to avoid major and unexpected problems concerning the property.
  2. Walk-Through Survey. This type of inspection isn’t performed in accordance with the ComSOP but should be completed annually to catch any potential big-ticket problems before they occur. The observations will be orally communicated to the client by the inspector, as no written report is provided.
  3. Custom Periodic Inspection. This type of inspection is a combination of the standard commercial inspection and a walk-through survey. Similar to a checkup at the doctor’s office, this is conducted using standard inspection procedures, while some exclusions or inclusions may be decided and carried out based on previous site visits.

The client’s objective for an inspection performed during the lease is oftentimes to:

  1. understand how the building as a whole is holding up;
  2. be aware of the preventive maintenance that is needed at the present moment or in the near future to help prevent or minimize future repair or replacement costs; and/or
  3. document the condition of the building throughout the term of the lease.

However, keep in mind that while you should include in your observations the need for potential repairs, you are not required to determine the cause of such need for repair or replacement of any system or component. There are two ideal ways for commercial inspectors to handle this. The first is to have the expert consultants who helped with the inspection to produce a rough range of repair/replacement cost estimates. The other way is to charge the client to arrange for gathering repair estimates from local contractors.

 

Post-Lease Inspection

This is similar to a pre-lease inspection and may be ordered by either the lessor or the lessee. The lessor will request an inspection to determine the condition of the property after the tenant leaves. The lessee may order a standard commercial property inspection to document the condition of the property before moving out, or for items that are considered normal wear-and-tear compared to what they will be responsible for repairing or replacing upon move-out.

The research portion of the inspection should be carried out with the same focus on questions and documents that are relevant for a pre-lease inspection.

 

Opportunities

There is a great opportunity for triple-net lease clients to become a regular stream of revenue for inspectors and their team of consultants. It is important for you to convey to your clients that incorporating regular visual inspections in their rental process can save them hundreds of thousands of dollars in the long term. A commercial property inspector will provide the unbiased information needed for building owners and tenants to develop a plan for routine and preventative property maintenance. The cost to repair and replace commercial building systems and components far exceed the same for residential properties. It is best to catch and monitor these items before they become big-ticket expenses. Even commercial properties that are advertised as turn-key will experience occasional problems that can lead to high-dollar repairs if they’re not dealt with in a timely manner.

Although the objective of a commercial inspection is to provide a written report for the client that describes the issues discovered from observations made and research conducted, the objective of a triple-net lease inspection client generally relates to the specific terms outlined in their rental agreement. An inspector is typically hired to the discover defects before problems occur at the most inconvenient time or at a high cost to remedy.

After performing an inspection for the building owner, lessor, or lessee, consider discussing the benefits of them having a visual inspection of property performed periodically or at the end of the rental agreement.

Triple-Net Lease Sample Letter for Inspectors

Conclusion

All commercial inspection projects are different. Understanding your client’s objectives for the inspection will help you best meet their needs, personalize their experience, and manage their expectations. Although there are various types of leases, a triple-net lease is unique because it assigns property maintenance responsibilities to the tenant. This can bring rise to unique risks for the landlord and tenant, and a triple-net lease inspection performed by a professional inspector can abate some of the associated risks. Always discuss the objective of the inspection with your client beforehand and hire consultants as needed.


Additional Resources:
Triple-Net Leases for Commercial Real Estate Investments and Rental Agreements
Commercial Real Estate Terms Inspectors Should Know