Understanding NNN Operating Expenses: Can I Negotiate a Cap or Limit my Exposure?

In a commercial lease, NNN operating expenses, also known as Triple Net expenses, refer to the additional costs that tenants are responsible for on top of their base rent. The term “NNN” stands for “Net, Net, Net,” indicating that the tenant is responsible for the following three types of expenses:

  1. Property Taxes (Net): This includes the tenant’s share of property taxes assessed on the commercial property. In Indiana, property taxes are paid in arrears. This means the assessed value is the prior year for taxes paid the following year (e.g., 2023 Property Taxes Payable in 2024). The landlord calculates the total property taxes for the entire property, and each tenant contributes a portion based on the proportionate size or value of their leased space.
  2. Property Insurance (Net): Tenants are required to contribute to the cost of insurance coverage for the commercial property. This typically includes insurance for the building’s structure, common areas, and sometimes liability insurance. As with property taxes, the tenant’s share is determined by the size or value of their leased space.
  3. Common Area Maintenance (Net): Common Area Maintenance (CAM) expenses cover the costs associated with maintaining and repairing common areas shared by multiple tenants, such as parking lots, hallways, landscaping, and other communal spaces. Tenants pay a proportionate share of these expenses based on the size or percentage of the total leased space they occupy.

When a lease includes NNN expenses, it means that the tenant is responsible for these extra costs in addition to their base rent. This type of lease structure is common in commercial real estate and is often seen in retail, office, and industrial leases. It allows landlords to pass on the operational costs of the property to tenants, providing them with a predictable income stream, while requiring tenants to cover the ongoing expenses associated with property ownership. It is important for tenants to carefully review and understand the NNN provisions in their lease agreements, as these expenses can significantly impact the overall cost of occupancy.

Negotiating caps on NNN (Triple Net) operating expenses is possible, but it depends on the terms of the lease agreement and the willingness of both parties to negotiate. Negotiating caps can be a way to limit the tenant’s exposure to unpredictable increases in operating expenses.

Here are some steps you can consider:

  1. Research Market Standards: Research market standards for NNN leases in your location and industry. Knowing what is typical in your market can help you make informed proposals during negotiations.
  2. Identify Specific Expenses: Identify specific operating expenses that you want to cap. This could include property taxes, insurance premiums, or maintenance costs. Being specific about the expenses you want to cap can make negotiations more focused.
  3. Prepare a Proposal: Draft a proposal that outlines the caps you are seeking and the reasons behind them. For example, you might argue that capping property tax increases can provide stability for the tenant and make it easier to budget.
  4. Negotiate with the Landlord: Initiate discussions with the landlord or their representative. Present your proposal, explaining the benefits of having caps on certain operating expenses. Be open to compromise and negotiation to find a mutually agreeable solution.
  5. Consider Lease Renewal or Amendment: If you are renewing the lease or negotiating an amendment, this may be an opportune time to discuss changes to the terms, including caps on operating expenses.
  6. Consult Legal and Real Estate Professionals: Before finalizing any negotiations, consider consulting legal and real estate professionals to ensure that the proposed changes align with local laws and regulations and protect your interests.

Remember that successful negotiation often involves compromise, so be prepared to find common ground with the landlord. Additionally, the negotiation process may vary depending on local real estate market conditions and the specific dynamics between the parties involved. Lastly always seek the guidance of an experienced CRE broker like Reliant Partners.