By: Chase Burke – June 22, 2021
An item that is often negotiated and incorporated into NNN Leases is a “cap” or limitation on the allowable annual increases to the Common Area Operating Expenses (or NNN charges) that a Landlord can charge (or “pass-through”) to a Tenant (for more on NNN charges, please review my “Beginner’s Guide” to them here). This is an item that I incorporate into LOI’s for the tenants that I work with to provide them with protection from unforeseen increases in these operating expenses year-over-year. Some of these unexpected increases could be caused by:
- An increase in the property taxes due to a sale of the property at a higher price than the Landlord paid for it
- An increase in insurance premiums due to a natural disaster in the region (fire, earthquake, etc.)
- Large capital expenditures that are required to the common areas and not budgeted for when the Lease was signed
There are other items that can trigger an increase in these expenses, but the above examples are a few of the common ones.
As noted above, I recommend this item to tenant clients that I work with as it is a “tenant friendly” provision that provides them with protection. Landlords do not always respond too kindly to this request but, with some negotiating, they can be receptive to it and a “cap” can be agreed to that is workable for both parties in most every situation. The initial request that a Tenant should include in the LOI negotiations should clearly define what the current NNN rate is and should define a clear “cap” on that amount. The request is typically for a 3% annual “cap”. As an additional “pro tip” I suggest including separate line items for CAM, taxes, and insurance. This is what the large national tenants do.
Please see below for example language from a previous LOI that I would recommend any tenant incorporate into a LOI for a NNN Lease they are negotiating:
- COMMON AREA AND COMMON AREA MAINTENANCE: Pro rata share. Landlord will grant Tenant the right to use all common area within the Shopping Center. Landlord will maintain and repair all common area located within the Shopping Center. Tenant will reimburse Landlord on an annual basis for Tenant’s pro rata share of common area maintenance expenses (“CAM”), which shall not exceed $0.50 per square foot per year through the first lease year. Annual increases in CAM shall not exceed three percent (3%) on a non-cumulative basis over the previous year’s actual CAM.
- INSURANCE: Pro rata share. Landlord represents the insurance was $.25 per square foot during the 2020 lease year. Landlord shall provide written documentation of actual insurance charges for the year immediately preceding date of Lease. However, annual increases in insurance shall not exceed three percent (3%) on a non-cumulative basis over the previous year’s actual insurance expense.
- TAXES: Pro rata share. Landlord represents the taxes were $1.00 per square foot during the 2020 lease year. Landlord shall provide written documentation of actual property taxes and tax parcel drawing for the entire shopping center for the year immediately preceding date of Lease. Tenant shall pay taxes annually or semiannually as billed by the local taxing authority. However, annual increases in taxes shall not exceed three percent (3%) on a non-cumulative basis over the previous year’s actual property tax expense.
For more information, please email me at: chase@romecre.com