For a typical NNN lease, how is the contract structured regarding vacancies of other tenants? For a simplified example, say we have a 10 tenant building and each tenant is renting the exact same square footage. Each tenant is therefore playing 10% of the property tax as part of their net lease. Now let's say one tenant vacates and is not immediately replaced. Are the remaining tenants still paying 10% of the property taxes (90% total) with the owner paying the remaining 10% while the vacancy remains? Or do the 9 tenants now pay 11.11% towards the property taxes and the owner still pays nothing?
The owner pays for vacancies. I don't own NNN properties (yet), but I certainly wouldn't sign a lease where other vacancies in a property that I have no control of increase my costs.
It's what Is in the leases for the tenants.
Some of the corporate tenants have a cap in the lease where they are only responsible for a certain amount of CAM re-imbursement and then it does not go higher.
Could you imagine if a building went from 90% to 50% occupied because of owner mismanagement??
How would it be the tenants fault to now cover a huge portion of CAM expense for the rest of the building??
So it's NNN but you still have costs when you have to pay out leasing commissions and tenant improvements for the new tenant occupying one of your retail units. The NNN is mostly covered but not always 100% on strips.
The lease should spell out the tenant's pro-rata share of operating expenses, taxes, and insurance and should also spell out how the tenant's pro-rata share is calculated. If it is in the lease it can never change go up. So if there is a vacancy, the LL is responsible for the expenses generally assigned to the vacant unit.
Where it can get fuzzy is the fixed versus variable operating expenses. Fixed operating expenses will remain the same regardless of occupancy levels (insurance, taxes) and variable operating expenses will fluctuate with occupancy levels (utilities, repairs and maintenance). If the spaces are not separately metered or with dedicated HVAC then tenants may run the risk of paying for utilities in the vacant space and have to rely management to be responsible for turning off lights and setting HVAC to minimum levels (55 degrees in winter, off or 78 degrees in the summer). Depending on the operations of other tenants other things could fluctuate like trash, repairs and maintenance, etc.
Bottom line - tenants should be protected in the lease from their share of operating expenses, taxes, and insurance increasing due to a vacancy. Look under Additional Rent, Operating Expenses, Real Estate Taxes and Insurance clauses.
Thanks everyone. I was reading something yesterday that sounded suspect (that NNN owners never have to worry about common fees, even with vacancies), so I wanted to confirm.
That's interesting to think about variable expenses in buildings that aren't separately metered. A clothing store would use much less water than a restaurant so might want it negotiated that they are paying a smaller percent for water. (Say they have 10% of the square footage, but they only pay 5% of the water bill). Is it common for older commercial buildings to not be separately metered or have most been retrofitted?
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