As a tenant, what are the pitfalls of a NNN lease? What should I look out for?
I’m negotiating a lease on a commercial property in a large US market. The LL is redeveloping a 300k+ sf industrial property for a mixed office/light-industrial use. I’m looking to rent about 5% of the available sq footage. It’s currently in a very “raw” state. But, I’m assured by the LLs broker that they have deep pockets and are prepared to make substantial renovations. The rent is sub-market, they’re offering a healthy TI Allowance, and are amenable to a long term lease. But, they’re insisting on a NNN lease. My attorney is a sharp guy. But, I’d be so grateful for the sub’s wisdom. What questions should I be asking the LL right now? Are there common (or not-so-common) pitfalls for tenants w a NNN lease? Are there any non-starters for you that a LL may try to slip into a NNN lease? I know this is a very open-ended question. But, I’d be so grateful for any opinions/experience from the sub.
[{"id": "i57dgn4", "text": "NNN leases in my experience are the standard for light industrial/warehouse/tilt up buildings. I don't really see any issues with them especially if you are doing a decent TI. Having more control over your own space isn't a bad thing.", "replies": [{"id": "i57ep4l", "text": "Agreed. I suppose my main concern is being stuck w unexpectedly high maintenance costs on an old structure. Is it typical that the tenant is responsible for sharing maintenance costs for the shell of the building(roof, exterior)?", "replies": [{"id": "i57h5vr", "text": "It depends on the market. There is no single accepted definition of a NNN lease. In my market, the LL remains solely responsible for the roof, the structure and the foundation, so those costs would not be included in CAM. In general, expenses of a capital nature are excluded from CAM. There is a whole long list of CAM exclusions that attorneys with CRE lease contract experience insert for their tenant clients. I\u2019m glad you have a sharp attorney, but my advice is to use an attorney for this transaction who has extensive experience with commerical leases. It also sounds like you are representing yourself. If so, it\u2019s too late to bring in an experienced broker to represent you. If not, then that person will be very familiar with the NNN lease form and will know all the \u201cpitfalls\u201d to avoid. \n\nI\u2019m a commercial LL, and 97% of my leases are NNN. There are usual suspects deal points that tenants insert in NNN leases. A \u201cCAM cap\u201d would be just one. The CAM exclusions I mentioned above would be another.", "replies": [{"id": "i57i7c4", "text": "Thank you for this. Very very helpful.", "replies": [], "depth": 4}], "depth": 3}, {"id": "i57rflc", "text": "It really all depends on how the lease is written. Generally LL is responsible for shell and core, but the maintenance of the shell and core is sometimes billed back through cams, capital improvements are typically not, although big ticket items such as a new roof can be amortized and billed back sometimes. Really just depends on the lease language. As the other person said, take a look at the cam exclusions. The downside to shell and core cam inclusions is sharing the cost for maintenance, however, it also has the upside of LL being more likely to keep the property in good working order - all depending on who the owner is obviously.", "replies": [{"id": "i59aa3m", "text": "Piggybacking - regarding the capital improvements, you can ask your lawyer or negotiate that you'll only be responsible for amortized portions during your lease. Some LLs will try to bill everything up front, so if you're on a 5 year lease, you'd end up paying the full cost of the HVAC (10 years more than you'd get the benefit of). Something to look out for.\n\nIf CAM/exterior maintenance is being billed back to you, ask for past accounting and likelihood of an unusual expense that wouldn't be reflected in the past billings. Make sure increases are based on the most recent year's expenses, so the baseline in the lease (and future year CAM costs) aren't irregularly high.", "replies": [], "depth": 4}], "depth": 3}, {"id": "i583okz", "text": "You can write in an annual cap for the NNNs, not to exceed X% of the previous year.", "replies": [], "depth": 3}, {"id": "i58vsa4", "text": "Ask exactly what is paid by you in the NNN, get it in writing, and get proof in writing of the last 3 years costs for said includes.  And if you're paying prorated something, make sure you know exactly what percentage that is.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "i57eyfc", "text": "Everything's gonna be NNN. what can really go wrong in a warehouse? hvac is the only really concern. Just get that inspected. Roof and under slab plumbing is still LL responsibility.", "replies": [{"id": "i57fa3p", "text": "Ok. This answers a key question. Thank you. The mechanical(HVAC, electrical) should all be new. So, that\u2019s promising. We\u2019re slated to get v1 of the lease today.", "replies": [{"id": "i58j84w", "text": "Some leases allow landlords pass back insurance deductibles for roof, hvac etc", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "i57hx75", "text": "Feel free to call out the roof specifically, but that should be LL's responsibility.", "replies": [], "depth": 1}, {"id": "i57hxts", "text": "Addressing lease hold improvements and costs at the end of lease for changes to the property.", "replies": [], "depth": 1}, {"id": "i57iqed", "text": "It is standard for commercial leases to be NNN.  This means the Tenant pays for property tax, insurance, and any common area expenses.  The Landlord is responsible for the roof, structural walls, and foundation.  Everything else is Tenant responsibility.", "replies": [], "depth": 1}, {"id": "i57iuti", "text": "You'll be fine. Have the HVAC inspected.", "replies": [], "depth": 1}, {"id": "i57l3ii", "text": "No nut November isn\u2019t for a few more months lad. No need to worry about it now.", "replies": [], "depth": 1}, {"id": "i57uth4", "text": "I'm on the LL side. Here is what you should push for and I think some version should be accepted by any reasonable LL:\n\n* Landlord should be responsible for roof, structure, all utility connections including lines up until the connection point of your space.\n\n* Ask for the LL to also be responsible for the maintenance and replacement of the hvac system. If you get pushback, I'd accept a scenario where the Tenant maintains it but the landlord replaces it if it's needed (and so long as you have properly maintained the unit).\n\n* Ask for a 3% cap on annual increases of controllable CAM expenses. Accept a 5% annual cap if there is push back.", "replies": [{"id": "i587qg4", "text": "Thank you!", "replies": [{"id": "i588em3", "text": "You\u2019re welcome. Good luck. I saw someone else mention asking for a cap on property tax increases. I personally would not ask for that because I think it\u2019s unreasonable. The landlord has no control over taxes, other than having the ability to protest them.", "replies": [{"id": "i58cpe9", "text": "Thanks! That\u2019s a helpful insight. Im not here to hammer anyone. Just find a fair deal and a reasonable partner (LL). \n\nIs it common for NNN leases to ask for the full proportional share of property taxes annually? Or, more common to ask for payment of property tax increases based off of the commencement date tax year? Or does it vary by market/lease? All of my prior and existing leases have asked for the latter. But, none of them made any mention of being a \u201ctriple net lease\u201d", "replies": [{"id": "i58dulz", "text": "Yes - a true NNN lease calls for the tenant to pay their full proportionate share of RE taxes.\nWhat you're describing with paying increases in taxes, rather than your full proportionate share, is a modified gross lease. As others have said, the type of lease (gross, modified gross or NNN) will vary by market, property type or sometimes an owner who just wants it their way. If your Landlord is dead set on having NNN leases at this property, you're probably not going to be able to negotiate to make it modified gross.", "replies": [{"id": "i58dz3a", "text": "Noted. Thanks again.", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "i59f6n0", "text": "I wouldn\u2019t bank on this. If the LL is set on NNN, it\u2019s unlikely he\u2019d accept these terms. Obviously does not hurt to ask", "replies": [{"id": "i5uih78", "text": "I think he\u2019s actually spot on as to what a fair ask from a tenant should be for a multi-tenant industrial property. \n\nYou can also throw in exterior walls to #1\n\nIt\u2019s almost always the case the LL is responsible for these items on multi-tenant buildings because the structure and roof are shared amongst all the tenants. \n\nAbsolute nnn lease structures would typically be for freestanding single tenant buildings.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "i58463i", "text": "Look into CAM and property tax increase caps.", "replies": [{"id": "i587dbo", "text": "Thank u. Will do.", "replies": [], "depth": 2}], "depth": 1}, {"id": "i5884r3", "text": "I'm in a niche market (Maui) and commercial is a very small portion. That said the areas where landlords cheat/fudge/are deceptive in my experience are:\n\n1. The CAM: Make sure you understand that while the base rent is fixed the CAM floats and can be adjusted retroactively, so six months or a year in you can get a bill showing increased CAM charges that are now due. Make sure your lease gives you the right to examine the CAM charges and determine if they are based on actual and not padded charges and that there is a right to appeal if there is a discrepancy.\n2. Bogus CAM charges for items that do not exist or barely exist. The LL can charge you reasonable fees for things like security, landscape maintenance, marketing, admin fees. Make sure that those things are actually delivered, ask about them before you sign the lease. Is there really ongoing marketing? What are they calling landscaping maintenance? When they cheat this is where the overstate, pad, or fail to deliver.\n3. Option to renew - when you sign a five year lease with a five year option to renew be sure you understand whether it is five years with your regular bumps as previous agreed, or it is \"at market\" which could mean a substantial bump if you are in a hot market or building.\n4. AC maintenance, of all the things that go wrong in commercial buildings the AC is the most important and in an older building most likely to break and/or fail completely. Make sure you understand who fixes and maintains and if necessary replaces the AC. I have seen more than one tenant get stuck with costly repairs or replacements in older buildings.  Ask to see the AC maintenance records, ask do they have an AC maintenance contract. Get a copy and read it. Have your own inspector look at the AC.\n5. Understand the difference between the leasing agent and the property manager. The leasing agent just wants to get you to sign the lease and get the commission and be out of the picture. On the other hand once you are in the lease you are going to be dealing with a property manager who may have a very different attitude and see what was promised to you very differently. Find out who is the property manager and actually speak with that person/company.\n6. Parking - is it designated or in common, are there loading zones? Make sure it's spelled out and identified with an exhibit in the lease and if it's identified show the stalls that are designated for your use and your remedies if infringed on.\n7. Exit strategy - if it all goes to hell know how to get out, make sure there's a way to get out, or at least the understanding that you can find a replacement tenant. Also know what of the improvements (TI) you can take with you.\n8. READ IT, READ IT AND READ IT: Commercial leases are typically long, over 100 pages not uncommon. You have to actually READ IT.", "replies": [{"id": "i588pgd", "text": "This is fantastic. I\u2019m very grateful for this.", "replies": [], "depth": 2}], "depth": 1}, {"id": "i58htqc", "text": "https://youtu.be/8fV461mCmgo\n\nLease walkthrough clause by clause", "replies": [{"id": "i58l62e", "text": "Super helpful! Thanks.", "replies": [], "depth": 2}], "depth": 1}, {"id": "i58jsrg", "text": "One issue a friend of mine ran into was change of ownership. In California when the property is sold the new owner has to pay the new tax rate, which could be quite considerable. If the contract doesn\u2019t preserve your stable property tax rate, make sure you understand what you could be getting into if they sell the property and the taxes go up. Depending on where you are, of course.", "replies": [{"id": "i58m85r", "text": "I\u2019ll have to research how the properties are reassessed in this market in those circumstances. Thanks for the cautionary tale!", "replies": [], "depth": 2}], "depth": 1}, {"id": "i59kaj4", "text": "WRT the shell, who maintains external doors?   What about when door frames  span multiple suites?\n\nSignage.  Can you advertise your business, or at least allow people to find you effectively.  Do you have to pay the landlord to put up the signage and are those charges reasonable?\n\nCAM  Buildings are re-configured over time with suite expansions and contractions. How have gas, electric and water lines been metered vs routed?\n\nSay a shoe repair shop shares a water meter with a new environmental testing laboratory that has to clean their samples with constant J2O flow...   \n\n\nWhen a neighbor trips a fuse does your power goes out or vice versa?  Water heater failures on a slab can create a big mess.", "replies": [], "depth": 1}, {"id": "i59mcxj", "text": "Ask for a limit on the yearly increases.", "replies": [], "depth": 1}, {"id": "i59qfy4", "text": "Think about it from the Landlord's perspective. If your CAM doesn't include the roof, what incentive does the Landlord have to ever replace it (Landlord cost) when they can keep patching it forever (included in CAM). \n\nCAM caps are great at holding a Landlord back from overspending, but they also disincentivise anything more than routine maintenance. \n\nGet a year or two of past reconciliations and look for any \"fluff\".\n\nTry to get out of Management Fees. They do nothing for you. \n\nHVAC is more complicated. When the responsibility is put on the tenant, they tend to neglect it. When put on the Landlord, they \"patch\" it forever.", "replies": [{"id": "i59uh6h", "text": "Great good for thought. Though, the LL acquired the property in the last year or so. I don\u2019t know what record they have of reconciliations. There are tenants. There is some rental history. But, not much. Is there any work around or best practice for predicting CAM expenses for a newly acquired property? Regardless I will certainly ask them to demonstrate whatever history they can provide.", "replies": [], "depth": 2}], "depth": 1}, {"id": "i5a2wtj", "text": "Real estate attorney here. I have a few things you should look at:\n\n(1) Is the TI amortized? If so, ask specifically if there is an interest rate applied on the TI. If there is an interest rate, this should be negotiated down. Also, if there is an interest rate, request that the interest is calculated on the actual days-per-year basis. Most, including banks, will calculate this on a 360 day basis, which adds to your total payment.\n\n&amp;#x200B;\n\n(2) What will the usable square footage be versus the rentable square feet? The developer/landlord will not specify and will charge you based on rentable square feet. This practice is the norm, but see if there can be wiggle room on the share of taxes/insurance/utilities based on unusable or structural space inhibiting your rental purpose. \n\n&amp;#x200B;\n\n(3) Is there a personal guarantee? These are somewhat rare, but if there is one, try to get it on a rolling basis instead of the full term. \n\n&amp;#x200B;\n\n(4) Will the lease require you to return it to its original condition after the build out? This can be very costly. \n\n&amp;#x200B;\n\n(5) What is the definition of a common area? Some leases are broad and include the roof, parking lot, etc. This can get expensive. If you are designated parking spots, ask that your proportionate share reflect the number of spots you have, not the space of the building (assuming you don't have many parking spots). Also, these charges may be called \"common area\" or \"common element\" but it can be used to incorporate fees that you should ask about. **Specify that these costs are a pass-through cost and not a profit center.** It is important to reiterate this throughout the lease. \n\n&amp;#x200B;\n\n(6) How are your annual increases included? With today's climate, many landlords are using CPI-U as a point for rental adjustments. You should ask for a local adjustment if you live in an area with less inflation. \n\n&amp;#x200B;\n\n(7) How are renewals structured? If you can get the landlord to leave out the important fact that renewals need to be adjusted to market rents, that is a win for you. \n\n&amp;#x200B;\n\nGood luck.", "replies": [], "depth": 1}, {"id": "i5akp6f", "text": "Been in lease admin for years (we\u2019re the team that actually administers and reconciles this section of the lease). Here\u2019s what to look out for:\n\n-first and foremost, see if you can get an annual cap on cam increases, try to keep to 3% and no more\n\n-strike out language that includes both an administrative fee and management fee inclusive to cam, one of these is standard, not both \n\n-watch out for a cumulative cam cap, any caps should compare year over year \n-make sure you retain audit rights to landlords books and use them if need be. Lots of $ to be saved here\n\n-if this all sounds like a headache, see if the landlord would go for fixed cam. Biggest mutual benefit is no year end cam reconciliation and you know what to plan for. Or even better, see if you can land a gross lease where your NNNs are contemplated and included in your base rent.", "replies": [], "depth": 1}, {"id": "i78ndog", "text": "You can always engage an account to audit your cams if you think is something off after a true uo", "replies": [], "depth": 1}]