Additional rent that you may be required to pay!
Yes… some types of leases require you to pay rent AND additional rent!
For NNN Leases
Triple net includes Common Area Maintenance, which covers all the expenses mentioned above. NNN also includes property taxes and insurance expenses, which would otherwise be the landlord’s responsibility.
NNN rents are often lower compared to a standard lease. Tenants pay for most NNN expenses. However, tenants won’t pay for non-recurring expenses, such as roof repairs, tenant improvement allowances, commissions, and parking lot paving.
Also, the expenses vary depending on the commercial property, so an office, retail, and shopping center will have distinct leases and requirements.
NNN vs. CAM: Is there a difference?
Common Area Maintenance is one of the three primary commercial property expenses tenants pay to landlords to cover operating expenses and overhead for common areas. Common CAM expenses include security, landscaping, scheduled maintenance, and trash disposal.
Other expenses on CAM properties include common area lighting, irrigation water, delivery areas, administrative fees, property management fees, sidewalks, driveways, stormwater, and electric maintenance.
Janitorial expenses, sewage, management salaries, window cleaning, stairwell maintenance, and loading docks also fall under CAM expenses. The expenses will vary from one property to another.
For Modified Gross and Full Service Leases
Base year operating costs are those incurred in the first year of a commercial lease agreement. Expense stops are limits on the amount of money that can be spent on operating expenses in subsequent years. CAM, or common area maintenance, is one type of operating expense that may be included in a base year operating cost. Tenants are responsible for their share of base year operating costs, as well as any increases in operating costs over the term of the lease. Operating costs can vary from year to year, so it's important to know which year your base year operating costs will be calculated from.
Operating Cost Allocation: Rentable vs Useable Square Footage
In determining how much a given tenant is responsible for when it comes to allocating operating cost, most landlords will calculate the amount of each tenant's share of these operating expenses using a pro-rata basis. Essentially, the operating expenses are allocated to the tenant based on the percentage of space they occupy in the building. So, if your business occupies 10% of the total square footage in a building, you would be responsible for paying 10% of the operating expenses.
While common area is included in the pro rata calculation, it is important to note that common area is not always common. In some leases, common area may refer to hallways, stairwells, and bathrooms. In others, common area may include the parking lot, common ground, or even the roof.
The best way to determine what is included in common area is to ask your landlord or leasing agent. They should be able to provide you with this information by showing a floor plan of the property which will include rentable square feet and useable square feet.
Rentable square feet is the total amount of space that a tenant occupies, and useable square feet is the actual amount of space that the tenant has available to use.
For example, if an office suite has 1,000 rentable square feet and 950 useable square feet, this means that the tenant has 950 square feet of useable space, but they are paying for the rentable square feet, which includes the common area.
Common area can also be referred to as load factor, and is typically between 10-15%. So in the example above, if the load factor is 10%, then the common area would be 100 square feet (1,000 x .10 = 100). This would leave the tenant with 850 useable square feet of space.
Keep in mind that load factor is not always included in the base rent, and you may be responsible for paying for common area separately from your base rent.
So who is bears the risk of Operating Costs?
The only certainties a tenant can count on in the life of their commercial lease are death and taxes operating cost increases and tax increases.
NNN properties transfer more expenses to the tenants, except for non-recurring expenses mentioned above. Such leases appeal to investors looking for low-risk properties because common area maintenance, insurance, and property taxes are all paid for by the tenants.
NNN properties also have lower rents to offset the tenant expenses. CAM properties don’t impose insurance and taxes on tenants, so investors have more risk to handle. As such, most Common Area Maintenance properties feature higher rents to cover the added risk.
However, CAM properties are susceptible to unstable income because of uncontrollable expenses such as tax increases and changes in building insurance.
Which is the best for you?
Like so many other considerations that must be made when negotiating a commercial lease agreement, the answer to this question just depends. And what is more, regardless of whether you pay additional rent via NNN charges or by calculation of a base year / expense stop formula, you are still paying for your share of operating expenses.
Thus, when negotiating your lease, it is important to understand how your pro rata share of operating expenses will be calculated, and what your rights are to audit the operating expenses are. Having this basic concept in mind during negotiations will help you to understand what your true monthly costs will be, and it also will help you avoid any surprises down the road.
And don't worry about trying to change the type of lease that the landlord is presenting because you would rather have it done a certain way. This simply isn’t the hill to die on as typically landlords will not change from a NNN to a FSG lease on a given property. Doing so would completely upend their workflow, banking and expense reconciliation for the co-tenants at the property. Just be sure that you understand the pros and cons of each type of lease so you can negotiate the core terms to your advantage.
