NNN vs Gross for Commercial Office

[Mike Giudici]

Which would you say is best for a property owner on a commercial class B office building and why?

The property in question is currently on NNN leases, the thought came up today to transition everything over to Gross leases.

I personally think that the leases should be left alone as NNN.

[Beverly Meola]

@Mike Giudici  it sounds like it depends on the market how prevalent triple net is compared to gross leases.  I've managed multi-tenant mid rise office buildings that were triple net in Ft. Lauderdale and Hollywood, FL and I'm pretty sure it was the same in Miami for high rises.  One of the midrises had in-house electricty sub-meters (EMON) so the tenants were individually billed electricity on top of common area and parking lot lights. Boston has multi-tenant high rise triple net office space with onsite managers.  

When I say triple net, it was full pass through of expenses controlled by the building management team.  Tenants were billed their pro rata share (CAM, TAX, INS) but the tenants were responsible for repairs in their spaces with the exception of HVAC.

I would say, if the tenants are already accustomed to NNN why change it? The downside of gross leases is that you lose profits when some expenses rise if you don't have any expense cap pass through clauses in your leases. Massachusetts is seeing a 37% rate hike in electricity from National Grid. Couple that with a property tax hike (which Worcester did this year) and you're totally squeezed.

If you DO go the gross lease route, make sure you are protected from this scenario in your leases.