2020 BOISE IDAHO REAL ESTATE BLOG
Understanding NNN / CAM Leases Main Boise Valley Commercial Real Estate
I've walked several industrial and retail properties with potential tenants lately and am reminded each time that these properties have a tad more complexity due to the nature of those leases since they are typically NNN or CAM type leases.

You need to understand the type of lease you are negotiating when dealing with commercail real estate properties.  You may be incurring legal responsibilites for costs you might not have anticipated if you don't understand the nature of the lease.

GROSS LEASE

This is a lease where the tenant pays one singe charge to the owner.  All utilities, building maintenance, and operating costs are paid by the owner.

NNN LEASE or TRIPLE NET LEASE

A NNN Lease is a Lease where the tenant pays their pro-rata share of real property taxes, insurance and operating expenses.

CAM LEASE or COMMON AREA MAINTENANT LEASE

 A CAM Lease is very similar but is used in retail environments locally, at least.  Retail properties can often have common areas for general use of all tenants or their guests and the respective tenants pay for the same items in the NNN lease, but since retail environments may have common use areas and typically more parking area, the leases are generally called CAM Leases.

SOME THINGS TO LOOK FOR ASSOCIATED WITH NNN AND CAM LEASES

In both NNN & CAM leases, tenants typically pay their pro-rata share of real property taxes, insurance, and operating expenses.  These expenses are generally estimated annually and paid monthly very similar to insurance and taxes paid on a residence through a mortgage / escrow company.  In theory, this is more efficient since the owner extimates the expenses each year and does not have to include a "risk" factor in case actual expenses are higher since all expenses are paid by the tenants (except those expenses attributable to vacant spaces, which are borne by the owner).  However, efficient as this may sound, there are some issues to look into when renting properties with NNN or CAM fees.

OVERHEAD FEE

Is the owner allowed to add a factor to the annual NNN / CAM fees?  In some leases, the owner may ask for an add-on factor to pay for administrative costs of estimating and collecting the fees.  Locally, the majority of leases do not have an add-on factor, but some range upwards of 10%.  If the owner does not have a property manager, an add-on might be appropriate.  On the other hand, if the owner does have a property manager AND there is an add-on fee, it is worth determining why that is.

LEASING AND MARKETING FEE

Leasing and marketing fees paid to acquire new tenants is generally a cost borne by the owner and should not be a fee paid by existing tenants.

Marketing costs to advertise the property for the benefit of existing tenants in a retail environment are generally specified and incurred with some level of tenant input.  Those costs are typically borne by the tenants on a pro-rata basis.

CAPITAL & MAINTENANCE EXPENSES

When leasing, make sure you understand how this issue is handled in the lease.  Typically, capital expenses are borne by the owner.  Some leases will give the owner the ability to do a cost - benefit analysis to see if a capital expenditure will reduce operating & / or maintenance expenses and, if so, to then include those costs in the NNN / CAM charges.

UTILITY COSTS (Water, electrical, sewage, trash, etc)

In most cases, with a NNN / CAM lease, the tenant pays for their cost of these utilities.  in some instances, one or more of the utilities may be provided by the owner to be billed directly to one or more tenants, or included in the NNN / CAM charges.  For instance, with a small industrial center with several small spaces, it may be more economical and / or efficient to have a single trash bin for common use.  In that case, the trash will be provided by the owner and all tenants pay their pro-rata share of the expense.  However, if one tenant uses an extraordinary amount of a utility, the owner should have that tenant arrange for their own service so other tenants are not unduly burdened by costs more appropriately borne by that tenant.

MAINTENANCE

This is the issue I am most interested in discussing with this blog.  Make sure you understand who is responsible for what costs in your lease.  Typically, the owner is responsible for the exterior and structural elements of the building.  As a tenant, you are typically responsible for HVAC maintenance, plumbing, electrical, etc...  So, if you are moving into a brand new building and the HVAC system needs to be replaced, you should be able to use the existing warranties.  But what if you're about to move in to an existing space and do not know what the maintenance program has been for the HVAC system?  Or what if the last tenant drained oil into the sump system?  First of all, you need to have an inspection done if those elements are critical or are otherwise of concern to you.  You might even look at capping your exposure in case a major element of the space breaks, like the HVAC.

SUMMARY

Make sure you go over the draft lease with your leasing agent.  You should have already made sure you are working wiht a qualified commercial real estate agent.  Real estate agents without any or much experience in the technical aspects of leasing a commercial space may not be aware of the different issues important when leasing commercial facilities.

If you need assistance evaluating your commercial real estate needs, please feel free to contact us.

Sincerely,

Scott Nicholson
Boise Valley Commercial Real Estate, LLC
208 890 3939
[email protected]
http://www.twitter.com/bvcre
 

 
Posted by Scott Nicholson at 5/11/2009 9:31:00 PM
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Michelle Penick, Boise Idaho Real Estate Agent

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Michelle Penick

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