Warning: Triple Net Lease Dangers and Drawbacks

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What Is a Triple Net Lease?

The appeal isn't difficult to see: Building owners are traditionally responsible for insuring the parts of the building that the tenants don't occupy. But with triple net leases, building owners don't have to insure anything - it's the tenant's responsibility. 

Shifting costs is one of the primary reasons building owners are more open to triple net leases. Logically speaking, if building owners don't have to pay to insure the building, why would they? In fact, they're often encouraged not to do so by asset managers, legal advisers and/or other "suits."

But if they knew what was good for them, they'd consult their Trusted Choice® insurance professional before jumping the gun. 

Concerns with Triple Net Leases

You know you can't have your cake and eat it, too. There are drawbacks to triple net leases, including:

  1. Knowledge is power: And in a triple net lease, you don't have it. Your tenant probably doesn't understand insurance. If you trust the tenant - someone without an ownership interest - to take care of insurance, you won't know how well the building is covered...ever.
  2. No control:  You will never control the insurance in a triple net lease. Sure, you'll probably be added to the agreement as an "additional insured." But that doesn't change the fact that if a tenant doesn't pay the premium or maintain adequate coverage, you're out of luck.
  3. Lease violations don't change property damage: If a tenant's lease requires certain coverage, and they don't get it, you're also out of luck. Sure, they've violated the lease. But you'll still have a damaged building and no insurance money to fix it.

The Issue of Trust and Triple Net Leases

Then there's the problem with trust, which is just too big to squeeze into a bullet point. Consider this: Most insurance policies include special rights for the mortgagor of a property. These rights include notification of changes and the ability to receive payments for a loss. This applies even if that loss is in direct violation of the terms of the insurance, such as a tenant causing intentional damage (e.g., arson). 

These rights are essential while the mortgagor retains interest in the property. But most landlords are not mortgagors. Sure, a landlord might be on the tenant's policy as an "additional insured." This means that if there is a claim, the landlord may be entitled to receive or share the payment. Here's the kicker:  "Additional insured" status provides no additional rights to the policy. 

If your tenant commits any violation of the terms of the insurance contract (like arson), the contract may be void for every insured—including you. Being an additional insured or interest does not change the coverage provided by the policy, either. So if the policy your tenant purchased does not cover flood loss and a flood damages your building, the insurance will not pay anyone, including you.

The Bottom Line

Triple net leases may save you green, but it comes at a cost. Know the cost of yours, and speak to a Trusted Choice independent agent before making any major decisions for your building.

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