Commercial Lease advice (When to use Triple Net?)

[Nicholas Mann]

Hello All,

I am currently purchasing a 2nd mixed use property in the same market. I renegotiated a Lease with my first property a few months back and pretty much stuck to the same terms as the prior lease agreement (minus rent increases). This new property is vacant and I will be putting it on the market once we close. My question to my commercial investors out there is when do you decide to implement a triple net lease or not on a commercial property? I plan on reaching out to a few owners in the area and seeing what their commercial lease agreements are like but I was wondering how other investors determine to ask for certain payments towards (taxes, utilities, Insurance, etc.) I know all of this is negotiable but I would like to have a little more knowledge and guidance before I list it on the MLS at market rent. Any and all advice would be greatly appreciated.

Thanks

Nick Mann

[Evan Polaski]

@Nicholas Mann, who is your target tenant?  

As for calculations, any bill backs are typically done on a pro rata basis of tenant GLA divided by total building GLA.  So if the whole building is 6,000 sq ft, across all 3 floors, and the tenant is leasing 1,000, you can recover 1/6th of the tax and insurance bill from that tenant.  In theory you could also recover 1/6th of the CAM costs, too, but in my very limited experience with mixed use, the first floor commercial could very well push back on that, since they very well may not be utilizing almost any of the common area, depending on building layout.

CAM would come from any number of places, commonly:

Cleaning and utilities for any common lobby.
Window cleaning for the building
Parking lot maintenance
Landscaping
Common HVAC maintenance, i.e. if a single furnace heats multiple spaces

Ultimately, you will want to be talking with either a commercial leasing agent or an attorney that specializes on commercial leases.

One thing to note, while NNN leases are generally great, there is certainly work for you on a semi consistent basis, in creating the monthly escrow amounts and annual reconciliation. And back to Chris's point, if your tenant knows that NNNs can vary widely, they may prefer a gross lease anyways. And if the tenant doesn't know that NNNs can vary widely, and therefore not budgeting for a big reconciliation bill (if something happened that caused you to under escrow), then they may not be able to pay anyways.