Authors: Krista Mansour, President/Owner, Footprints on Muskoka, Liliana Camacho, Director, Better Way Alliance, with input from Craig Marentette, Owner/Operator, Red Lantern Coffee
Triple Net Lease Blog Contents
> What is a Triple Net Lease
> Why Do Triple Net Leases Exist
> What Does a NNN Mean for Small Business Owners
> Commercial Lease Negotiation Tips
Welcome to the world of Triple Net Leases
You’re ready to renew your commercial lease.
Your landlord hands you a lease agreement with a clause that says:
“The Tenant agrees to pay undisclosed amounts related to property management upon request of the Landlord.”
Then the landlord tells you that if you don’t renew with this new lease, you’ll have 60 days to vacate the premises.
Would you sign it?
This is a real-life bad dream that actually happened to a Bracebridge business. A Triple Net Lease (TNL) is a lease where you have way more financial responsibilities than just rent costs. We are hearing of more business owners being on or offered a Triple Net Lease, and we think they are a bad idea for small businesses. In this blog post, we’ll break down what a Triple Net Lease is, what you need to keep an eye out for, and some tips if you’re already in one.
What is a Triple Net Lease?
A Triple Net Lease (NNN or TNL for short) is a type of commercial lease agreement where the tenant (that’s you) takes on more financial responsibilities than just paying rent. In this scenario, you also have to cover three “nets,” which are:
- Insurance
- Property Tax
- Maintenance
If you’re curious – there are Single and Double Net Leases, too. In a Single Net Lease (N lease), the tenant pays rent plus property taxes. In a Double Net Lease (NN lease), they pay rent, plus property taxes, plus insurance. Triple Net Leases are typically long-term commitments, usually lasting 10 to 15 years.
So you get that this sounds rather expensive. What else does this mean for you as a small business tenant?
Unfortunately, while the tenant is paying these 3 nets, the landlord still maintains the power in the landlord-tenant relationship. And there are no regulations in any province in Canada that prevent the landlord from including whatever extra costs they want under those nets.
A Real Life Example
Krista Mansour, owner of Footprints on Muskoka, a retail shop that sells comfy and stylish cottage and lakeside apparel, was in her Bracebridge, Ontario space for 5 years. Her first agreement was for a set rent amount plus utilities.
When it was time to renew, the landlord only offered a Triple Net Lease agreement. This would make Footprints on Muskoka responsible for rent, utilities and common expenses for the building (split between 6 businesses in the block). Some of these common expenses would be
- Building property tax
- Building insurance
- Maintenance fees
- HVAC & Plumbing Repairs
- Late fees on property taxes
- Health insurance for property manager
- Literally anything else
If Krista was unwilling to sign this lease, she would have 60 days notice to vacate the property. In her case, this lease offer happened in the middle of Footprints’ peak summer sales season.
Why do Triple Net Leases exist if they’re so expensive for small tenants?
Triple Net Leases didn’t start out as something that small businesses often encountered.
TNLs started with very large retailers, which had deep pockets and could devote resources to managing relationships with landlords and managing and expensing costs. These tenants could access credit instruments and financial experts that could help them cover their expenses and reduce their own tax burdens.
But now, Canadian businesses are being offered TNLs more often. For landlords, a TNL is a very hands-off relationship that makes sense (for them) when the landlord is an investor. What that means is that landlords (and investors) usually aren’t deeply committed to developing vibrant local Main Streets. They may be less willing to offer terms that foster long-term small business tenants offering great services to local residents.
Investing in the social fabric of our communities through good jobs and community investments is hard to do when a business can’t even project their costs. As Krista says “The thing that scares me…the investors have nothing to do with the community. People aren’t aware of what they’re signing.”
What does this mean for a small business owner?
For a small business whose cash flow is limited – and whose owner might be personally liable for business debt, it’s a bad, bad deal. Running a small business is unpredictable, especially when a lease may hold hidden costs. Landlords need to take the realities of local small businesses into consideration, and offer rent prices and terms that reflect realistic (cash and operational) realities to small business tenants.
When you’re shopping around for a new location, be very alert when you see a Triple Net Lease being offered by the landlord. Read the terms of the lease agreement being offered carefully and don’t sign to anything that looks like it creates too much unpredictability about costs, or puts you on the hook for things that you can’t define, you don’t control, or you don’t want to pay for.
What happened to Krista Mansour’s shop in Muskoka?
For Krista, signing the new lease was too much of a gamble. They were forced to close and vacate the premises. Their 2 other locations remain open. This was hugely disruptive to their summer sales, their staff, and their overall year’s financial picture.
Commercial Lease Negotiation Tips
It’s not always a bad deal for you. As a small business owner, one of the best ways to empower yourself to secure a better rent situation is to know how other owners have done it. Craig Marentette, owner of BWA member Red Lantern Coffee Co. in Kingsville, ON, shares his experiences with two successful lease negotiations:
“I have negotiated two leases at two different properties at this point in my small business journey. The first location I went into the first negotiations not knowing much of the differences between residential and commercial leases. I benefited from a landlord being in the same position as myself. We quickly agreed to terms: me being responsible for monthly rent and utilities and him responsible for everything else.
The landlord tried to sell the building 1.5 years into my 3 year lease and quickly realized how bad of a deal it was on his end. Many potential buyers were turned off by my favourable 3 year lease with option for 3 more years and no rent increases written into the lease.
I was eventually bought out of that lease by a buyer of the building. Timing was on my side with the second lease as it was the early months of COVID. A cafe in our town had closed at the beginning of COVID and had no plans or reopening.
The negotiations for the second location were helped by establishing my business in town and proving to the new landlord that we were a viable business pre-COVID and during lockdowns. His space had been empty for 5 months and he was looking for a business that would add to the downtown core and thrive in varying world conditions.
We were able to negotiate favourable terms for both of us. I was responsible for monthly rent, utilities and anything inside the building envelope and him responsible for taxes, building insurance and anything outside of the building.
Overall, I have been lucky with two reasonable landlords and in my timing of my two lease negotiations to secure positive leases medium term leases.”
As business owners, take advantage of windows of opportunities – like nearby business closures and economic downturns – to improve your negotiating position.
Do you have a commercial rent question or story you want to share with our network?
We’re constantly adding stories to our Commercial Rent Horror Stories page. If you’d like to add your story, or know someone that has been affected by a difficult commercial rent situation, contact us.
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