Are Triple Net Lease Property Investments Risk Free?

Published July 25, 2016 | By Napier & Blakeley

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?

It is, of course, vitally important that the investment is protected. A property with deferred maintenance and a high level of capital expenditure requirements over five or ten years, will have a lower commercial value compared to the same or similar property with less of an expenditure profile.

For this purpose, astute investors keep an eye on their tenant’s approach to asset management and the way that repairs, maintenance, and replacements are programmed and performed, through annual inspections and audits.

A good approach and regime can be established early in the relationship. The annual review and report can be used as a tool to measure progress, to set future targets and to determine any corrective action.

For more than 30 years Napier & Blakeley has helped both owners and occupiers of commercial property with such matters.

We perform lease reviews and help the parties understand both lease and statutory obligations and how these can be best met;
We assess condition and performance of the building elements and forecast the scope and timing of commercially appropriate repairs, maintenance and capital replacements;
We prepare accurate cost estimates for budgeting purposes and to improve cash flow. We model the capital allowances and tax depreciation benefits in terms of write-offs from any strip out or demolition and then establish the future benefit that flows from the capital expenditure.

Some recent relevant projects include: