Commercial Tenant on a NNN Lease

4 Replies

Hello Investors!

Here in CA when you buy a property, the property tax will be a % of the sales price. With this being said, If i were to buy a commercial property with a NNN leases, can I immediately increase the share of the property tax since it will significantly change due to a new sales price?

What would be the process in informing the tenant that his share of the property tax will increase?

Can this also apply to other types of commerical leases?

Thank you and have a wonderful day ahead!

If the current tenant has a lease, the lease cannot be changed without all parties approving of the change.

Now, if the written lease says tenant is responsible for property taxes, but doesn't specify a specific dollar amount, then I would say the charge increase based on the actual number.

The same would be true of utilities. If the lease says Tenant pays $100 a month for utilities, then you can only charge them $100 a month. If it says tenant is responsible for all utility charges, then you charge them whatever the actual amount is. 

Make sense?

@Nathan G. Hi Nathan, Thank you for your response. Yes, I do get it now. I appreciate it.

All I do is NNN.

When you say buy a NNN lease you need to specify if you are talking a mom and pop tenant, regional, national and also whether STNL ( single tenant) or MTNL ( multi-tenant) property.

In each lease you pull a lease ABSTRACT which tend to be all the important items of the executed lease. There might be language such as if the property taxes increase then the tenant has the right to require the landlord to dispute the taxes to the city,county etc.

Even if this is a single tenant NNN lease national company if the government is upping the property taxes to crazy levels you might still as the owner want to dispute the taxes. If that tenant ever goes out the second or third generation tenant might not be national but regional or local in nature and if NNN and taxes are really high above base rent you might have to go lower on rent to land the tenant.

If this is a strip center with NNN leases then the leases typically state the tenants WILL ONLY cover their pro-rata share of property taxes,expenses,etc.

Example if you had 6 tenants in a building and then 2 go out the other 4 tenants do not want to shoulder the expenses for (CAM) property taxes, maintenance, and management fees above their base rent for spaces they do not occupy and do not generate sales out of.

What you do is check BEFORE while under LOI or PSA with a local tax attorney who challenges and appeals the property taxes to see what is the custom for after a sale. Some states and areas the taxes do not really change. Other areas they can try to go way up. It really is all over the place.

If taxes are expensive and slated to go up upon the sale then what we have done in the past is get a credit from the seller at closing of say 25,000 or 50,000 to hold in a reserve for that anticipated expense.

Even with a strip center if tenants are not national even if they are supposed to pay increase in property taxes they might not can afford a big jump which would increase their overall CAM per sq ft above their base rent. You have to look ahead and model out various situations to plan for how things might pan out when you are purchasing so you can try and put some safeguards in place.

Short answer is to check your lease. It will specify whether taxes can go up unlimited or may have a % cap.

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