What Are The Components And Charges Of A Nnn Lease?
NNN ground lease or triple net lease has four components. Base Rent, Taxes, Insurance, and Common Area Maintenance (CAM). CAM, Taxes, and Insurance make up the NNN ground lease. Typically the lease will treat base rent and NNN lease separately. Base rent will be a set amount with possible increases per year or changed by CPI.
NNN ground leases are passed through to the tenants. Each of the expenses is estimated at budget time and then divided by the square feet of the property and the estimate is charged to each tenant based on the sq. ft. of their space. At the end of the year all the expenses are reconciled and tenant accounts are credited or debited based on whether the budget was exceeded or not. Typical expenses in NNN ground lease are as follows but the lease will specify exactly what is and is not.
Taxes – The charges related to the taxes are the most important ones and should be taken with foremost attention. Property Taxes for the building and land. This should not include property owner income taxes or tenant personal property taxes.
Insurance – Insurance charge is another important charge which should also be taken with seriousness. Liability Coverage for the building and common areas, Casualty Insurance for the building, Casualty Insurance for the signs and fences. Doesn’t include content and liability insurance for the tenant.
CAM - Almost always: Litter pickup, Common area lighting electricity and maintenance, parking lot maintenance, landscaping maintenance, security, minor roof repair, exterior small repair, painting/graffiti removal, housekeeping(if applicable).
Occasional charges: Some charges are levied when the need is there and should be excluded when it is not put into practice. These charges are property Management Fee (ask what it is), a/c maintenance (if not to tenants individually), large repairs like parking lot overlays.
Charges which should be excluded: Some charges should not be there in the NNN ground lease and one should ensure that capital Expenses like roof replacement, parking lot dug up and redone, A/C replacement, etc. are excluded.
The Important points for a tenant are 1. What CAM covers or can cover 2. How much variation there is year to year? 3. How close to the estimate is a landlord generally 4. Does the landlord charge an estimate or whack everyone at year end with a big bill?
The reason NNN leases exist is that those expenses are the largest variable expenses and it is difficult for a landlord to predict what they will be 3, 5, or 20 years out which many commercial leases with options can sometimes run. As a result NNN ground lease is designed to remove the guesswork and hedging necessary to do a long term lease. I’ve had tenants demand a gross lease and what they get in terms of pricing is my NNN price with worse case scenarios for future expenses added to it. This tends to be property taxes and insurance driven as CAM is fairly controllable.