Triple net leases may cause problems for business owners - East Valley Tribune: Ahwatukee Foothills

Triple net leases may cause problems for business owners

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Posted: Wednesday, July 6, 2011 9:00 am | Updated: 4:21 pm, Mon Oct 29, 2012.

In a changing economy some small businesses are finding out the hard way exactly what their lease means and it could result in fees they just can't afford.

"When I moved here from Washington State two and a half years ago, I was told with the economy being so bad it wasn't a good time to open a business," said Gayle Palms of Phoenix Holistic Health in an email. "I saw it as an opportunity. Coming from a different environment, I felt that I could bring a lot to the community; after all I ran a successful business for almost 10 years. At the time of signing the 42-page lease contract, I didn't realize I had agreed to pay the triple net fees for all the vacancies in the Mercado shopping center."

Over time Palms discovered that as other tenants left, her lease required her and the remaining businesses in the plaza to split all the fees and costs that it takes to run the building. As tenants left due to the tough economy it made the financial situation of Holistic Health even tougher.

"Most of these contracts were written many years ago when the economy was on the upraise," Palms said. "They didn't adjust them to fit in with the changing time. In 2010 we had several vacancies in our mall. They divide the triple net fees up among the remaining tenants according to square footage and make us responsible to pay the dues. I got a bill for $4,000, plus a $2,000 deposit. The additional $6,000 on top of my already high rent was too much for a small business."

With another business, Walgreens, set to leave the plaza soon Palms worried about what the fees would be like for the next year. She ended up making the tough decision to close her doors and search for another location.

The lease Palms signed is not uncommon, according to Don Lieberman, director for KW Commercial for more than 29 years. Lieberman said it's tough for any business going into a retail space to find a lease besides a triple net lease.

"Every shopping center has it's own leasing requirements," Lieberman said. "The triple net, basically what that entails is reimbursement of expenses for the shopping center on common area issues. Lighting, the parking lot, landscaping, insurance, taxes and so forth. The tenants typically pay their share of what that expense is. It's usually a per-square-foot number anywhere from $3 to $8. Around Ahwatukee it's probably about $5 per square foot. Most retail leases, like in a shopping center, are going to be triple net leases. There's really not many exceptions. They're all going to be triple net leases and they're all going to have a clause in there about reimbursement."

Lieberman said some landlords will not require tenants to pick up the slack when other tenants leave but some will. It depends on the plaza and the landlord. Overall, Lieberman said leases are usually black and white and landlords aren't trying to throw a curve ball at their tenants but some leases are more complicated than others. Some can be only seven pages long, others can be around 60.

"Bottom line is what the lease says when you enter into that agreement," Lieberman said. "The unfortunate side is people getting into a retail shopping center and trying to negotiate the lease on their own. It's not that they're stupid, they just don't understand what they're actually getting in to. They should be advised to hire a real estate attorney or a real estate broker that does commercial real estate to review it. They can probably avoid some confusion down the road."

Lieberman said many times a tenant can negotiate that portion of the lease before they sign it but after they sign the lease it is set in stone.

For Palms that means leaving this location and searching for another. She's hoping the support of the community will point her in the right direction of a location that won't charge too many fees.

"Most of us small businesses pour our hearts and souls into making a success out of our businesses," she said. "I feel blessed that I have a lot of Ahwatukee supporters. I'm hoping to find another location close by so we can continue the services that we love so much. I felt that The Phoenix Holistic Health Center was a great assess to the community with our diverse modality and educational classes. We really enjoyed being part of the Ahwatukee community. I just can't compete with the climbing triple net fees. It would be a different story if the economy were on the upraise. I'm not a Safeway or Walgreens. Most of my money comes from hard earned wages."

Lieberman suggests anyone looking for a commercial space to lease take the time and money to hire a commercial broker or real estate attorney. If a broker is hired many times the landlord will end up paying the fees for the broker.

"When I work with tenants I tell them to make sure they understand everything," Lieberman said. "It's their life savings and they're hoping it will take off. Some do and some don't and I hate to see people lose money. Unfortunately, once the lease is signed and agreed upon you have to live by it, you can't go back. Unfortunately, things happen when there's a dramatic change in the life of the shopping center. It's very difficult to undo what has already been done."

Lieberman's office is right off of Ray Road in Ahwatukee. He can be reached at (480) 706-7220

• Contact writer: (480) 898-7914 or ahurtado@ahwatukee.com

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