Triple Net Lease questions for multiple tenants in a building
Hello all, I've got some questions around Triple Net Leases when having multiple tenants in a building, and I was hoping you guys could help! I understand that in a triple net lease, the tenant is not only responsible for the rent (and sometimes utilities), but also the insurance, maintenance, and property taxes, but I don't really understand the details of how this is all organized and conducted.  


* For insurance, does each tenant get their own insurance for their space, or do they just pay their percentage of the landlord's entire building insurance?  
If each tenant has their own insurance, who's responsible if something happens and the insurance doesn't cover it? Is there much risk in the tenants not getting the correct insurance with enough coverage? Does the landlord still insure the entire building?  


* Does the landlord pay the property taxes and then charge each tenant their percentage for that month, or is it spread out over the entire tax period?  


* For maintenance, who's usually responsible for the roof, building exterior, and common areas? With a single tenant in a building, I imagine it's easier than with multiple tenants.  
Is there much risk in the tenants not properly maintaining their space?  


* When the tenants are responsible for the utilities, does the landlord pay the utilities, and then charge each tenant their percentage each month, or do the tenants pay their utilities directly?  


A Triple Net Lease vs a Gross Lease is supposed to be less work for the landlord, but other than maintenance (which shouldn't be much for a building in good condition) it actually seems like more work to figure out the dynamic costs per tenant every single month, and constantly be in communication with the tenants for what they owe each month. To me it almost seams easier to just do a Gross Lease where the landlord pays for everything and manages everything, but then has higher rent. Of course then you take on more risk with unexpected costs or increases in costs. Any thoughts?
[{"id": "flon4hq", "text": "Someone please jump in here if I'm wrong (only studied this in school and been an investor), but I believe it works like this:\n\nFor insurance.  I believe you've got insurance on the building, which you divy up to the tenants to pay. The tenants will have their own insurance as well (someone slips and falls in their store, etc)\n\nFor property taxes, its pro-rata to the tenants\n\nFor maintenance, same deal, \"common area maintenance\" is split among the tenants on pro-rata basis.\n\nFor utilities, I'm not sure what the \"norm\" is. But I work in construction, so I often will see a building where there's a single service into the building, but each tenant has their own meter, and contracts out to the utility on their own. Utilities for common areas (like lights in the parking lot) would get split up among tenants pro-rata.", "replies": [], "depth": 1}, {"id": "flop43r", "text": "Look up CAM expenses. This expense unlike rent can be adjusted yearly or more based on actual expenses. So you estimate the cost of all those items you listed. Like building insurance, divided up per square footage and add that onto thier monthly rate. At the end of the year if it's a little short or if insurance cost increases, you adjust cam up.", "replies": [], "depth": 1}, {"id": "floqfil", "text": "In NNN, your rent is (theoretically) paying for the owner's capital and nothing else.  Tenant pays all maintenance, utilities, property taxes, insurance, etc.  \n\nFor things that benefit the owner - e.g. property taxes, insurance, maintenance - the landlord is going to pay it and you pay the landlord.  The way this is typically done is with an established common area maintenance (CAM), Taxes, and Insurance rate per square foot.  You pay your pro-rata share of the overall expenses for the property.  This is collected monthly with rent and reconciled annually - you may owe a little at the end of the year or you may get a credit/check.  For utilities or things specific to only your portion of the property (e.g. plumbing repairs), you don't go through your landlord, you just take care of it.  Or potentially the landlord has a property manager who can coordinate the repairs and bill you.\n\nSome exceptions might be for roof maintenance/repairs, structural repairs, replacement of HVAC systems or HVAC maintenance over a specific dollar amount.  This is all negotiated but those are common for landlords to pay.  There might also be provisions like a cap on the amount that a property tax increase can be passed on to a tenant - the rest being a cost to the landlord.  \n\nIn general, the bigger you are the more you can negotiate - a successful publicly-traded company leasing in multiple locations owned by the same landlord has some bargaining power.  A local business making a small annual profit has very little.", "replies": [], "depth": 1}, {"id": "flp21xy", "text": "I\u2019ve even seen some savvy landlords charging a 4% management fee inside the CAM. This makes it more attractive when selling for sure. Always look at your property as if you\u2019re buying it and operate accordingly. Agreeing to no increases at an option renewal or reducing the term can come back to bite you when selling.", "replies": [{"id": "flr1o0e", "text": "&gt;slashstillrules1987\n\nA 3-5% PM fee is pretty much standard. Sure, it's a profit center for the LL, but it's always going to show up.", "replies": [{"id": "flw4tz0", "text": "Would this fee be 3-5% of the tenant's base rent?", "replies": [{"id": "flx80lh", "text": "Think of that as it relates to the overall income of the building rather than per tenant. Management fee is charged against EGI.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "flq66sn", "text": "Think of it this way.\n\nBase Rent is approximately landlord's profit before vacancy losses, financing costs, and income tax. It is the return on capital.\n\nIn periods where there is some vacancy, the landlord will need to pay those common costs allocated to the vacant unit.\n\nIn this scenario, the CAM costs are something that benefit the tenant. A well maintained building is good for business for the tenant, disrepair is not. On a 20 year lease, on a building with 1 tenant, what does the landlord care about maintenance? Of course good repair is better than no repair at the end of the term, but a fixed AC unit or new paint in year 2 actually doesn't do anything for the landlord. The landlord is after their profit in the form of rent.\n\nI'm OPs situation, there are many tenants on different lease expiration dates, so the landlord has to manage the common area, but the principle is the same as above. Common area maintenance directly impacts the tenants.\n\nProperty tax is really a business tax. Again, the tenant has possession of the property so they must pay the tax. This also keeps those taxes low otherwise the municipality would try to hike the tax on the 'greedy landlord's.\n\nThe landlord's business is one that really deals with financing costs, and risk of mismanagement and vacancy risk. These NNN rents likely result in lower costs for tenants and lower risk for landlords. The higher risk if absorbing all property taxes and variable expenses into a gross lease would require a higher return (higher overall rent) to the landlord. \n\nHope that makes sense", "replies": [], "depth": 1}, {"id": "flqv15a", "text": "This is quite a loaded question and the loaded answer is that it depends. Most are set up to pay a pro rata share of expenses, but I\u2019m happy to break it down or even help you in a more granular level if you want to PM me", "replies": [], "depth": 1}, {"id": "flr1hla", "text": "Google \"Common Area Maintenance (CAM)\" as that's sometimes used as the catch-all term for NNN. It is estimated per SF per year (just like rent) then reconciled annually. It's how you deal with all the pass-through expenses (NNN). Tenants pay it on a monthly basis as a part of their rent then they may owe or get a refund once reconciled. Just like income tax. \n\nEveryone has their own insurance, but the LL will require to tenants to list them as additional insured to protect. The minimum amount and type of insurance they are required to carry is dictated in the lease. Failure to provide a certificate of insurance is a default. \n\nTypically, tenants are responsible for what's inside their space, tenant-specific improvements outside their space (like cooling system for a walk-in, exhaust fans, etc)  plus HVAC. LL is responsible for the building envelope, parking lot, monument sign, landscaping, roof, etc. That's normal structure but can vary per lease. LL maintains the common areas but charges the tenants for those services through CAM.\n\nEach space is metered separately and in the tenant's name. The building lights, parking lot lights, monument sign, etc., are all in the LL's name and charged back to the tenants through CAM. \n\nBenefits and drawbacks to NNN vs. Gross, but NNN is a better set up for the LL. Gross doesn't allow for the variance that can arise during ownership such as a tax reassessment.", "replies": [], "depth": 1}, {"id": "fm9vor2", "text": "some really good detailed answers already here, so i'll just chime in on a couple specifics:\n\nMaintenance in single tenant vs multi you are exactly right.  Single tenant buildings tenants tend to handle much more of the exterior items but very common for landlord to have responsiblity for roof and structure.  Yes tenants are very likely to neglect their responsibilities on these items.  Not always on purpose, mostly just not staffed for this.\n\nUtilities could mean each tenant has their own electric service and pays it directly, but water paid by landlord and allocated on per sq ft basis.  Gas could be on a single service and submetered.  or any combination of these.  Lease will typically say separately metered or allocated proportionately.  \n\nTriple net with multi tenant buildings which require detailed accounting and annual reconciliations probably are a bit more work but really not that much for an organized PM.  As you noted, bigger issue is risk.", "replies": [], "depth": 1}]