The three “nets ” or payments (besides rent) for a commercial real estate lease are: taxes, insurance, and common area maintenance/operating expenses. A lease agreement with base rent, plus the net payments, is referred to as a triple net, or NNN, lease.
Is a NNN lease better for the landlord or the tenant?
The predictability of a triple net lease is one of the reasons it is popular with both landlords and tenants. Landlords like the predictable cash flow that comes from a credit-worthy tenant , and the landlord can spread costs across a longer-term lease. The tenant knows it will also have good, credit-worthy co-tenants that want to have a well-maintained shopping center, who feel the same way and are fiscally responsible and pay their share of the rent. The lower base rent is attractive to the tenants, and the higher costs are spread out and shared among all of the tenants in a set amount.
The amount of each net should be based on the square footage that the individual tenant occupies in proportion to the total amount of the shopping center, or the building, that is being leased. The tenant wants the landlord to maintain the property- pay the taxes, keep proper insurance, and maintain the areas that are shared by the tenants and their customers and employees in good and safe condition. The tenants contribute their proportionate share pf the cost, and the landlord is responsible for doing the actual work and being reimbursed by the tenant NNN contributions.
Can triple net lease costs be negotiated?
A triple-net lease can be negotiated! Insurance costs and taxes are usually outside the control of the landlord, so those costs are usually set and not negotiable. The operating costs, or CAM (common area maintenance) costs, are where most of the negotiation takes place. Many of these costs are ones that the landlord can shop for and get competitive pricing, so they are known as “fixed costs.” The definition varies, but the usual exemptions from fixed costs are taxes and insurance, utilities and snow and ice removal.
Taxes for commercial real estate are generally set by the taxing authorities, but the tenant will want some assurance that the landlord is protesting the taxes, or if the landlord does not protest them, then the tenant will want the ability to do so. This can be negotiated into the commercial lease agreement!
Insurance is important because if there is a casualty and the property is damaged (like a burst pipe or a tornado), the landlord needs the insurance proceeds to rebuild the property, or possibly to satisfy its lender if it has a mortgage. What insurance is carried, and who is covered by it, can be negotiated in a NNN lease!
CAM costs are where the most negotiation takes place. All tenants should contribute in proportion to their size, in relation to the entire rentable area, so no one tenant (or the landlord) is subsidizing the use of another tenant. The landlord may also build in a cost to manage and maintain the property. The tenant needs to be wary of what costs are included, or excluded, as some costs should be the responsibility of the landlord, like capital replacements. Alternatively, the tenant could control its contribution to these costs by having a CAM cap, or a maximum amount that the CAM costs can increase annually, no matter that the actual CAM bill is. Sometimes, the parties select a base year, and the tenant only pays the increases in CAM over the base year, which may be periodically reset, depending on the length of the lease contract (or its renewal). If you’re not sure what costs to negotiate in a triple net lease, schedule a no-obligation discovery call with The Law Office of Jenna Zebrowski, PLLC to discuss how to control your costs in your commercial real estate lease!