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How Triple Net Lease Landlords Benefit from Improving HVAC Efficiency

A triple net lease (NNN) is an arrangement in which tenants take on all three “nets” of real estate expenses—maintenance, property taxes, and insurance—in addition to base rent and utilities. While triple net lease landlords do not benefit from HVAC optimization savings as directly as their tenants, these landlords benefit from improved HVAC efficiency in other ways. This article explores the advantages triple net lease landlords experience from improving the efficiency of their building’s HVAC system.

Triple net lease benefits

Advantages for Owners 

Triple net leases are most commonly structured for low-risk, long-term occupancy. This benefits commercial real estate investors by guaranteeing consistent income while minimizing potential losses from vacancies. NNNs are also advantageous to the landlord in that if major, unexpected expenses arise (i.e., significant snow removal, HVAC repairs, etc.), tenants are responsible for covering the costs. Additionally, triple net lease landlords are able to guarantee income since 100% of expenses are reimbursed by the building’s tenants.

Advantages for Tenants

One of the primary benefits of NNNs for tenants is that expenses are reconciled such that tenants receive a refund in the event expenses come in under budget. Additionally, NNN tenants generally have more control over their ability to customize space, which is appealing for franchisees and national companies looking to standardize their physical branding. These companies can make updates and changes to their locations without investing the capital required to acquire property.

Advantages of HVAC optimization for triple net lease landlords

Generally speaking, landlords have little to no expenses for their triple net lease properties. Why then, would a real estate investor make energy-efficient improvements, when tenants are responsible for maintenance and utilities?

Saving in common areas where landlords bear the energy costs. In some triple net leases, the landlord is responsible for the utilities in common spaces. In others, if they retain space for themselves within the building, they must cover the energy costs to heat and cool that floor, for example. Optimizing the HVAC system holistically lowers operating costs for the building, saving owners and tenants alike.

A more sustainable facility can demand higher rents. Improving HVAC efficiency will lead to significant cost savings for existing tenants, which means long-term rents can be renegotiated. Additionally, companies looking for triple net lease agreements generally have Environmental, Social, and Corporate Governance commitments in place. As a result, they are attracted to facilities that can be marketed as sustainable. This can be used by lessees (or owners) for positive press, making buildings more attractive and worthy of higher rents. 

Supporting compliance with green legislation to avoid fines. Many of the largest cities in the United States have enacted laws that require buildings to meet certain emissions standards. These include New York City’s Local Law 97, Boston’s BERDO, and Seattle’s BEPS, among others. Greenhouse gas limits will get tighter in the years to come, with fines for non-compliance. Since the leading cause of building emissions is the HVAC system, optimization helps facilities reach compliance without having to make large capital expenditures for new equipment. 

Reducing operating costs improves tenant retention. Lower energy costs means lower monthly overhead for lessees. Happy tenants are more likely to renew their leases, reducing the possibility of vacancies and turnover costs.

Enhancing the value of a property. Energy-efficient buildings typically have higher property values due to lower operating costs and increased demand from tenants. By investing in efficiency, the landlord can increase the property's value, which can be advantageous in terms of potential future sales or refinancing.

Equipment that runs at peak efficiency lasts longer, reducing replacement costs. While tenants under triple net leases are responsible for operating costs and equipment repairs, landlords are responsible for replacing equipment. By ensuring equipment runs at peak efficiency at all times, landlords extend the life of their equipment and thus reduce replacement costs.

Improving HVAC efficiency with Beacon AI

Beacon is a lightweight controls optimization software that integrates with your facility’s existing building automation (BAS) or management system (BMS). It studies and analyzes your HVAC system’s performance tendencies based on real-world conditions. Then, it autonomously optimizes control settings to minimize energy consumption in real time, resulting in up to a 30% decrease in operating costs and emissions. Beacon also acts as a single source of truth for building energy consumption, streamlining reporting requirements for ESG stakeholders.

Beacon is 100% cash flow positive. Landlords will only pay a portion of the savings generated from optimizing their HVAC system with Beacon. This means all of the aforementioned benefits can be realized from “found” money while not eating into income from the property.

Check out our FAQ article to learn more about Beacon.

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Ben Keylor
Ben Keylor
Sr. Content Manager
February 29, 2024