Triple Net Lease
When buildings are constructed or remodelled or when industrial production facilities are to be repurposed, it is advisable to evaluate the different interests as well as goals and risks (understood as chances and dangers) at an early stage; both in-house as well as externally. This allows to detect and exploit the optimisation potential.
If a production facility is to be built for the purpose of leasing, and if the developers’ focus lies in minimising investment costs and a stable and therefore foreseeable rental income, the possibility of including elements of the shell lease and the triple net lease in the lease agreement must be examined.
In case of shell lease a lessee rents a property with an unfinished interior, which the lessee will finish according to his or her wishes and at his or her own expense. This will result in lower investment costs for the lessor and therefore lower rent for the lessee. In addition, a shell lease allows the lessee to make tailored improvements without the need to acquire real estate. In this context, the basic finishing of the structure, and therefore the intersection to the lessee improvements, must be precisely specified in the lease agreement. This is essential for the determination of the lessee’s maintenance obligations and the extent of a possible dismantling of the lessee improvements and also the determination of the determination of the compensation for the appreciation of the object as a result of the lessee improvements.
In addition, in the case of a triple net lease, the lessee can agree to be solely responsible for the entire maintenance, repair and renovation costs as well as the real estate taxes, dues and insurance costs, which would otherwise be the responsibility of the lessor. Therefore, the lessor obtains a triple net income. It is disputed whether such an extensive shifting of the obligation to bear maintenance costs is legally valid. Arguably it should be acceptable when the lessee does not suffer a disadvantage from such an agreement, i.e. if the lessee is compensated for assuming the aforementioned responsibilities. As compensation, beside a reduction of the rent, the parties could e.g. agree on a long-term lease, which would allow the lessee the amortisation of the lessee improvements. Nevertheless, the lease agreement must take into account the remaining legal uncertainties.