When Systems Break Down

WHEN SYSTEMS BREAK DOWN East Downtown, HoustonA reader writes: “The non-profit I work for is currently looking for a new office. We found a great location in East Downtown, near the new rail line, recently renovated, and a great price. It is essentially our dream office. During the lease negotiations the realtor said that after 90 days into the 3 year lease, if any plumbing, electrical, or HVAC issues arise, we would be responsible for paying it. Including any replacement and labor. When countered with a ‘no,’ the realtor stated that this was a normal practice in Houston and ‘good luck trying to find a place that will let you get away with that.’ Being new to this process, we are curious if this is true. The current office we are in does not require that and I personally have not heard of it other places.” Photo: Russell Hancock

18 Comment

  • Yes. When you enter a NNN lease. (triple net) you are responsible for everything including insurance, maintenance, and taxes. If you are currently renting in an office building you very likely do not have this type of lease. But if you are renting a larger space or the entire property a NNN would be standard practice.

  • Class A is Class A, but it seems as you move down the ladder to B- and below the urban/suburban market bifurcates; the suburban managers stay relatively professional, but the urban managers get progressively more idiosyncratic.
    My wholly unsupported assumption here is that the suburban property managers understand they have an interchangable product, identical to thousands of other mid-rise and low-rise buildings littering every feeder road and thoroughfare in the city. Whereas the urban Class C landlord is used to dealing with idealists who zero in on “hip,” “walkable,” etc. Tenants like, say, a small nonprofit in love with a superficially refurbished warehouse on the wrong side of 59.
    Point is, no, this isn’t normal practice. You’re being played, because they’ve identified you as an easy mark.
    Find a new realtor and keep looking.

  • It is COMPLETELY negotiable. Some Landlords will agree to cover some or all of those items for a certain amount of time. The realtor who said “good luck” in finding someone who willing to do anything but what was stated is 100% wrong. If this particular Landlord is not flexible, you can have all of the systems inspected prior to signing the lease to make sure they are in good shape and if not, you can then negotiate with the Landlord to have him either replace or repair as needed.

  • This sounds ludicrous. Why would I want a tenant making any maintenance decisions on something I own? A tenant will almost always go the cheap route and possibly cause future damages that may become apparent next time it is on the market. Similarly why would I as a tenant accept the potentially huge financial costs that come along with a property that I won’t be in three years from now? What kind of discount on rent would make that a sound bet?

  • I assume you got an inspector and reviewed the place before you sign a lease for a business? I never did that when i rented but i assume a business lease is different.

  • Ya triple net is the greatest scam a landlord every came up with. The great part is your are responsible for your share of anything they want to do. Oh. Time replace parking lot since we are at full occupancy and you have to pay.

    Keep looking and screw all nnn landlords screwing over people

  • It really just depends.

    If this is a milti story office building with a common climate controlled hallways and common areas, then this is unusual.

    If this a single story office (flex/service center) with no common corridors, then this is very common and normal in the market. If the HVAC is directly controlled by Tenant and the building, this is also another sign that the repairs described will be a Tenant’s responsibility.

  • Guys, say what you want about NNN, but they are NORMAL for a deal wherein the user is planning a large buildout or conversion. Bottom line is the landlord wants nothing to do with your plans for a warehouse conversion where likely very little could be reused in a future deal with a different venture. I would use a NNN on this deal because the last thing I’d want is some bozo calling me every week because the plumbing they added to an old building has problems flushing.

    Bottom line, the realtor was right. The landlord walked for a reason.

  • I wonder if the poster could elaborate more on their deal to put it all into context. Don’t disclose too much, just enough to paint a picture of what you’re proposing.

  • As a commercial real estate lawyer with experience leasing millions of square feet I can tell you this is not unusual, but a thorough inspection coupled with good maintenance should mitigate your risk. Are you being represented by an experienced lawyer as well?

  • I’ve worked for several non-profits – and saw our office buildout contract as well as our subsequent lease agreement. As one of the finance people, I had to read those docs with a fine tooth comb (always a prudent thing). We did NOT have such a clause (‘after 90 days, tenant is responsible for plumbing, electrical, et cetera”) in our contract – and we did that back in 2010.
    The landlord may be trying to negotiate that into the contract but I would suggest that the prospective tenant keep looking. Time may soften the landlord’s position. (Or, not.) But, office leases can be longer contracts and it is a hassle to move one’s business.
    As for the realtor’s comment: if they were working for me, I’d have asked them to provide 3 recent examples of this “standard” practice. I’d want to see fully executed contracts within the last 3 years. Otherwise, I’d heavily discount their take on this. Caveat emptor.

  • All is negotiable. However, In my experience in the Houston retail market, the standard as a Landlord Rep for a NNN Lease, “absolutely” net lease, Tenant is responsible for HVAC maintenance, repair and replacement. As a Tenant, you would want landlord to guarantee it is in working condition for ex. 90 days, if it is not ancient. If the system is over 10 years old, you definitely want to ask for landlord to replace it or reimburse your cost to replace it. There are many things as a Tenant, which you need to know to ask for. This generally applies to office and industrial. What you can get away with, just varies depending on the property, the property owner and the management style.

  • i’m a commercial real estate investor (and landlord) and have been treasurer of a nonprofit. this included evaluating and negotiating leases in the east end for the non-profit. everything in a lease is negotiable… the statements you received are likely based on the landlord’s sense of demand for the property. the non-profit for which i volunteer has fortunately had a couple of successive eds who dug hard for our lease spaces. we also had an excellent realtor helping. we’ve gone from anson jones on canal to 2409 commerce (now listed for $2.5m as a swankienda) to our current location on leland. none of our leases have been triple net.

  • I’m a commercial broker. We (commercial brokers) love it when the other party is represented by a residential agent/realtor. They have no business doing commercial transactions, and we get extremely favorable terms when working with them. And they have no clue.

  • Howdy!

    I am the reader that originally posted this. Thank you for all of the awesome feedback. Here is some more context:

    1) This is a second floor of a 1930’s era building that has been remodeled. We are not requesting any build outs or physical changes, we are just moving in.
    2) It is about 2,000 square feet, just office space, storage closets, one bathroom.
    3) The building is shared with another tenet, downstairs. Realtor says that they tenet down there has the same contract, but we haven’t verified.

  • Oh, and this is not listed as a NNN lease. It is a modified gross.

  • If it’s a modified gross (I assume you’re just paying utilities), it seems very strange that you would be responsible for maintaining mechanical systems, especially in a multi-tenant building. I’d be careful.

  • Oh if only I could have NNN apt renters :)
    For what it’s worth, we own one commercial building (3 story in midtown). It has a single renter for the whole building. It’s a NNN deal. They pay for repairs, taxes, etc. I think only foundation (?) is covered by the owner.