Triple Net Increases
We rent a space in a shopping center in Sammamish, WA, a fairly well-to-do area and the rent is pretty atrocious. Throughout 2018, our NNN expense was $543.66. In June 2019, we had a huge reconciliation for NNN, amounting to a $3,435 charge; if that had been properly budgeted our NNN would've gone up by $286/month.

As you'd expect, our NNN went up right after the reconciliation to $964.01 monthly from 07/2019, and up again to $1098.27 in January 2020 until 07/2020.

We just got the reconciliation bill for that timeframe, and it's a whopper. $6,675.54. By that reconcilation amount they've been underbudget by $556.30.

In 2 years, our NNN has increased from $543.66 to $1654. This seems like gross mismanagement. 

There wasn't a ton of work done to the property in this timeframe, either. 

Does anyone know if there's anything at all we can do to fight this? They sent me a nice semi-itemized list of all the things they spent tens of thousands of dollars on (over $35,000 on "life safety repair and maintenance" after a $14,000 "life safety inspection"). They don't explain what was done. $22,000 for "exterior painting" when there was only a very small amount of paint done on the complex, and none on our building.

I also notice that for every expense that they charge, they add 15% as their "administration fee" that the management company pockets; doesn't this incentivize the management company to mismanage the money, because spending more on the complex gets them a bigger share? That feels like a conflict of interest.

Any help or advice will be appreciated.
[{"id": "fz1ydp7", "text": "If there was a recent bank transaction, refi or acquisition then the life and safety could be legit as it\u2019s required to be remediated within, say 180 days of closing.", "replies": [], "depth": 1}, {"id": "fz1yg8x", "text": "How much time is left on your lease?", "replies": [{"id": "fz2ay9x", "text": "4 years, actually. We extended our lease when we expanded last October. All of my figures above are actually for the original 1100 SQ ft space; there's an additional reconcilation charge for the 1050 SQ ft expansion but it's not as much because it was only charged rent for several months instead of the full year.", "replies": [{"id": "fz2g50u", "text": "Lol you don\u2019t find the fact you doubled your square feet relevant?  Your cam bill is billed per square foot.  \n\n15% management fee is standard as long as it\u2019s only on the cam fee itself and not total rent, regardless it\u2019s almost certainly in your contract.", "replies": [{"id": "fz2jgcg", "text": "Our CAM is billed separately for each unit, with the expansion billed separately.\n\nFor the purposes of this discussion I didn't bring in any of the costs or expenses from the expansion space. It had its own NNN reconciliation which is just as much by percentage as the space we've had for 3 years, but smaller total because we've only been in the space for a few months.\n\nSo if I included them together, the NNN reconciliation is actually $7800. That's what I'm probably going to end up paying. But I didn't bring up the expansion area originally because it doesn't have the history that the main space has.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fz21huu", "text": "Holy smokes that\u2019s terrible. I\u2019m a broker in the area, if you want I could send you average triple net charges near you tomorrow morning for you to compare against!", "replies": [{"id": "fz2azmj", "text": "I'd appreciate it; anything I can use to leverage against this company would be helpful.", "replies": [], "depth": 2}], "depth": 1}, {"id": "fz22fjz", "text": "Your definitely getting fucked.  Someone probably bought the building and is squeezing you to make their returns.  How many other tenants are there?  Does your lease specifically cover management expenses or are they just billing you for the 15% extra?  What are the dispute mechanism I need your lease?  I promise you this; if you don't start making noise that $1,600 is going to be $2,500 real quick.", "replies": [{"id": "fz23nye", "text": "Redbreaker has solid advice. Only thing I could think of specifically is if there are caps on increases. Language that I would look for is controllable vs. non-controllable. \n\nI would also call your neighbors in the building and ask them what they have seen and what they would like to do as a cohesive unit. \n\nAlso in my area, property management charges at most a 4% oversight fee so 15% if true does seem extremely high, but your lease would be the controlling document. I would recommend calling a couple of commercial property management groups to see what their standard fee is on overseeing basic mandatory projects.", "replies": [{"id": "fz258f6", "text": "Something else that occurred to me, get the actual invoices. Don't accept a line item in a notice from the property manager for $24,000 of painting.  Demand the invoices so you can a) see if xxx square feet of painting was charged it was actually done b) if they are charging 5x the market rate for painting [or whatever the expense is].  Do this for EVERY SINGLE THING they pass through and keep copies.", "replies": [{"id": "fz34nk5", "text": "This. Check your lease for audit language around CAM charges.  You should have the ability to get copies of all invoices if you request it.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "fz2ud89", "text": "I agree they need to make some noise, but the 15% admin fee is pretty standard and the management company wouldn't have anything to do with the property owners returns unless they are one-in-the-same.  Based on my on personal experiences with buildings I own and having to increase CAM, I would be willing to bet a good bit of this increase is for property taxes.  Property taxes were really low after the last recession and then they shot up during the boom.  Some of mine have just about doubled.  You need to make sure the management company is disputing property tax value to get the bill lowered.  There are many companies out there that do this for a small fee and it is well worth it.  \n\nIn regards to the other fees, demand they itemize these fees and justify them.  Make them explain why these were needed and demand to see actual receipts if they are not providing.  Contact the company on the receipt and find out what they did.   It may be worth paying an attorney a couple of hundred dollars to draft you a letter to scare them.  You would be amazed how quickly they tend to find their errors once they know an attorney is involved.", "replies": [], "depth": 2}], "depth": 1}, {"id": "fz2i5m5", "text": "Asset Manager here who controls all major NNN decisions in our PE CRE investment firm that specializes in retail investments. I have a couple observations (in no order):\n- A property management firm usually charges 4%-5% of \u201cgross rents\u201d as their fee for their services. It\u2019s a real cost to the landlord. However, what gets \u201cpassed through\u201d to retail tenants and included in the NNN expenses could actually be different. Your lease may dictate in the definition of CAM that a \u201cmanagement fee\u201d equal to 4% or 5% of gross rents will be included, or there could be an \u201cadministrative fee,\u201d which is usually equal to 15% of the CAM portion of the NNN expenses or maybe all of the NNN expenses.  The three nets (NNNs) are CAM (common area maintenance), real estate taxes, and insurance premiums.  Management fees and administrative fees are two different ways to pass through management expenses to the tenants.  In most markets, the administrative fee will be cheaper than the management fee (unless you have a low base rent and high NNN scenario).  Administrative fees were created by national-credit retail tenants as a way to reduce their occupancy expense,and transfer costs back to the landlord, and they\u2019re common in big box leases. If you decide to relocate or renegotiate your lease, you want administrative fees over management fees in the definition of CAM expenses, and 15% is the most typical administrative fee. \n- In our market, huge jumps in NNNs are often related to increases in real estate taxes, typically due to an increase in the tax appraisal. Did the information you received from your landlord say anything about increases in real estate taxes?  In some of our properties, taxes are equal to CAM.  In high tax areas, you might see NNNs broken down as 50% taxes, 40% CAM and 5% insurance premiums. But, every market is different, and that may not be the case in your market. \n- Does your lease have a NNN audit provision?  It\u2019s not standard and would only be there if your attorney or broker negotiated it into the lease.  You want this as a tenant. I hate them as a landlord, especially when tenants hire third-party auditors. That\u2019s why I only agree to fixed-fee arrangements, because CAM auditors working on a % are incentivized to waste my time and nitpick me.  CAM audit provisions are common in big box leases.  If you have one in your lease, then you could consider auditing the landlord due to the huge % increase in your assessment. If you don\u2019t have one, you may have trouble getting the landlord to supply you with copies of individual invoices.  \n- Does your lease have a cap on annual increases in NNNs?  Like the audit provision, it would only be in the lease if your broker or attorney negotiated it. I hate them (for obvious reasons) and always insist our counsel draft them to exclude \u201cuncontrollable\u201d expenses (e.g. real estate taxes, insurance premiums, utilities, security expenses, snow removal).  I also insist they be \u201ccumulative,\u201d so a single-year increase doesn\u2019t trip us up. So, it\u2019s 5% per calendar year, compounded annually.  For example, we could have a 3%, a 2% and then a 6% annual increase and still be able to pass through 100% of the expenses without the cap being applicable.  You, as a tenant, would want the cap to be no increases in any single calendar year beyond x%.  You want this in your net retail lease, because you\u2019re reimbursing the landlord 100% of your pro rata share of the operating expenses, so it matters, like in your seemingly egregious case.\n- It\u2019s common for attorneys representing tenants like you to add language to the CAM definition in the lease to exclude anything of a capital nature, and if there is a major replacement that may or may not be capital, then it can only be passed through (1) if it reduces operating expenses, and (2) it must be amortized over it\u2019s useful life. Does your lease have language like this?  There are reasons a landlord may replace a fire/life safety system that has reached the end of it\u2019s service life, but I would not try to recover 100% of it in a single year from my tenants, which could be what your landlord is doing. On the one hand, a landlord may recover most of the expense quickly, but you risk pissing off and alienating your tenants. And, tenants don\u2019t forget huge NNN reconciliations and big increases in NNN estimates.  It\u2019s bad business IMHO.  It sounds like that\u2019s what happening to you, and I\u2019m sorry.", "replies": [{"id": "fz2k7fb", "text": "A lot to go over here, but generally speaking, no, we don't have any of that protective language in our lease. Regency essentially rejected anything we wanted to modify in the lease agreement; they have a stranglehold on the commercial market in our area and I think they realized they have anyone who wants to do business in our market over a barrel. It also didn't help that our broker was \"a great guy and good friend\" of one of our real estate agent friends and he was worthless. We are the ones who ended up signing, but I was under the impression that NNN fees would be rather consistant through our term or at least the increases would be reasonable, not on the order of 300%.\n\nAll three of the nets increased this year; I can't fault the landlord for property tax increases, but I don't understand how I'm being charged for things like $15k for HVAC maintenance and repair when there's no common area with any HVAC equipment, and we have to provide our own HVAC maintenance and pay our own repairs for our space. \n\nWe are on a 15% administration fee, but I don't understand how that is a good thing for the tenant; doesn't that add incentive for the management company to balloon costs so they can charge more admin fees?", "replies": [{"id": "fz2yob4", "text": "You shouldn't be charged for 15k for HVAC maintenance unless its your units directly above your space that were needing repair. Does your lease have specific language about HVAC cap / who is responsible for said maintenance and repairs? Most tenants will negotiate a per annum HVAC cap of \"X\" amount and that Landlord will be responsible for any thing over and beyond, as long as said repair or maintenance is not due to tenant negligence.", "replies": [], "depth": 3}, {"id": "fz2ysh5", "text": "If there are no audit rights, you can still ask for support regarding the increases. GL or invoice. Sounds like there could be smaller capital items included in some of the life and safety increases (sounds like one project that should be amortized). Also, painting project can be excluded as capital or amortized. If it\u2019s the whole building, when was the last time it was painted? Are admin fees or costs included in your lease language?", "replies": [], "depth": 3}, {"id": "fz3b1q4", "text": "I agree with you on NNN increases.  It's normal for them to go up over time, but 300% in two years is not normal.  I've never seen anything like that in 26 years of CRE.  I'm not in your market, but I think you're right to question it.\n\nHVAC wouldn't normally be in CAM if there are no enclosed heated/cooled common areas.  I can think of two exceptions:\n- (more likely exception) the landlord has a maintenance inspections contract.  As you pointed out, a standard NNN retail lease contract allocates responsibility for HVAC maintenance and repair on the tenant, because HVAC systems are typically designed and installed in each tenant space and are not common.  However, I've seen some landlords who don't trust their tenants will actually perform the routine maintenance, so the landlord has the units inspected annually to ensure compliance with the lease provisions and then passes through the cost of the HVAC inspection.\n- (less likely scenario) the landlord mistakenly included the cost of repairs or the cost to replace an HVAC in a vacant space.  Typically, repairs or costs related to a specific space within the property cannot be included in CAM (e.g. HVAC repairs, tenant improvement allowances, leasing commissions, etc.).  I've never seen a landlord willfully include suite-specific expenses in CAM, but I guess it's possible.\n\nRegarding 15% admin fee, I always tell my people that we start with a management fee in CAM, and we only back up to an admin fee if we have to.  Consider this example:  say we have a 100,000 SF shopping center with base rents of $35.00 PSF and the NNNs are $12.50 PSF ($6.00 for taxes, $5.50 for CAM, and $0.50 for insurance).  The total (\"gross\") rents paid by tenants is $47.50 PSF (plus some miscellaneous income), which would be $4.75M annually.  The property manager charges 4.0% for its management fee, so that would be $190K, which would then be included in CAM (sometimes it shows outside CAM, and yes, it's a circular reference).  However, if a tenant negotiated a 15% CAM admin fee in lieu of management fees, then you'd take CAM of $5.50 PSF at our 100,000 SF center, which would be $550,000 annually, and the resulting admin fee would be $82,500.  So, you can see why as a landlord I prefer management fees, because I can recover $190K of my management costs from the tenants; however, if I have to agree to admin fees, then I can only recover $83K.  I agree with you that one could conclude admin fees motivate a property manager to spend more, but I've never seen this in my experience.  Usually, the property manager is motivated to keep the NNN expenses a low as possible, because everyone benefits from a well run property.  It's not in the landlord's interest to let NNNs get out of hand.  It hurts tenant retention, new leasing, etc.  I'm used to being accused by my tenants of mismanaging expenses when there's an increase, and I understand.  No one wants a big reconciliation invoice.  I often see my competitors artificially lower their NNN estimates to benefit new leasing, but I believe the anger tenants have when they receive large reconciliations is not worth the initial misleading NNN estimate.\n\nIf I were you, I would ask for copies of invoices for the large line items and see what your landlord says.", "replies": [], "depth": 3}, {"id": "fz4cn3z", "text": "You said Sammamish and Regency... if it's Inglewood Plaza their assessed value increased around 20% for the 2019 assessment year which is what determines the 2020 property taxes. That's following around an 8% increase each of the prior two years.  There was also a big jump in the property tax rate a couple years ago as a result of a court decision on school funding.\n\nOf course that wouldn't explain the other charges you're describing though.\n\n[https://komonews.com/news/local/who-gets-the-money-many-left-with-questions-after-property-tax-increase](https://komonews.com/news/local/who-gets-the-money-many-left-with-questions-after-property-tax-increase)", "replies": [{"id": "fz4vekm", "text": "Klahanie shopping center, actually.", "replies": [{"id": "fz56hgc", "text": "I guess I should have paid attention to your user name lol. The Klahanie Center\u2019s assessed values have increased a more reasonable 5% per year or so. \n\nIt\u2019s worth pointing out that they\u2019re currently appealing their 2019 assessment. Should they prevail they\u2019d receive a property tax refund from the county based on the difference. \n\nI\u2019ve always sort of wondered how it works when the landlord receives a property tax refund in relation to the NNN\u2019s they pass through to the tenants. I can\u2019t imagine the landlord gets to pocket it, right? But then it doesn\u2019t seem like they\u2019d have a very strong incentive to appeal if they\u2019re just passing the expense through anyways.", "replies": [{"id": "fzzgwvq", "text": "Depends.  My former boss, who was one of the renters in a multi tenant office building, had to fight to get his share of the re tax refund when the owner appealed it.  Though the building had about 70% occupancy, so the owner did have a reason to appeal the assessment.", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "fz2ygff", "text": "This is very sound advice. We see this alot with mom and pop retail tenants who unfortunately do not try and negotiate the controllable vs non controllable as well as those who do not try to negotiate a cap.\n\nIt sounds like this center could have been running lean and traded and you're spot on about the taxes. More than likely it's an increase in RET that is causing the huge reconciliation increase especially if its WA real estate in a highly affluent area like he described. \n\nUnforuntate to see. Great advice here though I like seeing this type of stuff on this thread. OP listen to this and next time get a broker to negotiate these sticking points because these little things are what they look for and know how to negotiate down.", "replies": [], "depth": 2}], "depth": 1}, {"id": "fz2y94u", "text": "Are the major items being amortized over 10 to 20 years or all in one year split evenly to all tenants?", "replies": [], "depth": 1}, {"id": "fz3bvbb", "text": "I\u2019m assuming that the NNN increase is CAM and not tax driven, although a reassessment could drive a large increase in NNN charges that your landlord can not control.    Typically the largest variable to any retail property budget is snow removal, unless your center is on a fixed contract.  A few bad snow years in a row could wreak havoc on CAM charges, particularly at a small center.   If the problem is not taxes or snow, then you are dealing with \u201ccontrollable\u201d costs (which are not always truly controllable) and those numbers are pretty crazy for controllable cost growth.  \n\nI\u2019m very surprised that there is not a controllable cost cap on your lease, as it is fairly standard lease language to cap controllable cost growth at 5% or so year-over-year.   It sounds to me like there may have been significant deferred maintenance at the property that is now being addressed on your dime, and that\u2019s what a controllable cost cap is intended to eliminate.   As for the 15% admin fee, that is also standard (10-15% in lieu of a management fee), but again a controllable cost cap eliminates the abuse you are fearing.\n\nIronically, with so many tenants struggling in 2020 due to COVID, my company has been cutting operating costs dramatically across the board to save our tenants money, but we have had to ask all tenants (usually as part of a rent deferment plan) to agree to base their controllable cost caps off of 2019 expenses. Otherwise we would have no incentive to save money In 2020 as we would either get screwed by the cost caps in 2021 when operating expenses return to normal, or we would need to ease in increases resulting in deferred maintenance.    CAM is one of the most complicated subjects in retail real estate.", "replies": [], "depth": 1}]