Are Triple Net Lease Property Investments Risk Free?
Many property investors believe that triple net leased property investments make for good, safe, passive investments.
This can be the case, but there can also be serious financial consequences should they not be managed properly.
Triple net leases differ from traditional leases in that the tenant is generally responsible for all of the operating expenses including repairs, maintenance and life cycle capital expenditure – a new roof, air conditioning system, lifts, and the like.
However, there are risks to be aware of with such property. Triple net lease investments are often single tenanted properties, perhaps with a special purpose or use.
The commercial stability of the tenant is of course fundamental in any investment, but in a triple net lease are they also going to:
- Take a proactive and planned approach to managing the asset?
- Keep on top of property maintenance and life cycle repairs and replacements?
- Fully understand what their obligations are?
- Know how to live up to and manage their end of the bargain? Continue reading
‘Make Good’ Planning Makes Good Sense For Leased Property
Fortunately, only a few Make Good disputes end up in the Courts. However, the potential for protracted arguments is on the rise.
Some of the drivers include:
- Changing conditions in the resources sector seeing engineering firms and the like, downsize;
- Large corporates relocating to new developments;
- An increasing demand for smaller spaces generally, through improved efficiencies and flexible work environments.
When it comes to handing back tenancy space the Lessee will need to comply with obligations to ‘yield up’. This is typically where the arguments start. Differences of opinion in who owns what; what work needs to be done to return the property to a condition ‘as at commencement’; whether current condition falls under the exception of ‘fair wear and tear’; and whether the extent of partial repair requires full replacement – to mention a few.
Disputes that run beyond the lease term are settled by ‘damages’ – a financial settlement following a claim. These not only include the costs associated with the physical works (typically $200 – $300/sqm for offices) but also legal costs, loss of rent and outgoings.
The good news is that such arguments (and additional costs) can be avoided – through good planning. Continue reading
