Net net lease, or NN lease
In a net net lease, the tenant pays their share of property taxes and property insurance. The landlord pays for all the common area maintenance.
This type of lease is less common than a triple net lease, but it has its advantages in some situations. This type of lease may be attractive to potential tenants because it minimizes their risk. A net net lease is also more common when the common area expenses are shared among multiple properties within an investor’s portfolio.
A net net lease will usually have a slightly higher base rent than a triple net lease since the landlord has more expenses to cover.
A net lease isn’t a commonly used lease. This type of lease only requires the tenant to pay their share of the property taxes while the landlord covers the cost of property insurance and common area maintenance.
A net lease normally has a higher lease rate than a net net lease, usually even higher than a triple net lease.
When a landlord covers the costs of property taxes, insurance, and common area maintenance costs, it’s referred to as a gross lease. This is a very common type of lease in office buildings.
The gross lease simply requires the tenant to pay a flat rental rate without fluctuations in property taxes, insurance rates, maintenance costs, or other operating expenses from one year to the next.
The landlord will even cover the tenant’s utilities in a lot of gross leases, and some will even go as far as paying their tenants’ janitorial costs.
The above descriptions are the common terms for these lease types, but terms can vary greatly from one lease to another. Some markets also have slightly different standards on how expenses are shared between landlords and tenants.
Since triple net leases are the most common type of lease that passes costs on to the tenant, they will commonly be referred to simply as a net lease — which can create confusion. It’s important for everybody involved in the lease to fully understand exactly what they’re paying for.
A property owner has to structure their leases in a way that maximizes their return on investment. While passing CAM charges on to the tenant is often considered the most favorable lease for the landlord, the operating costs on a particular property may provide a higher return with a gross, net, or net net lease.
How are CAM charges calculated?
Landlords may choose to charge CAM costs to tenants in one of a few different ways. Some methods are designed for simplicity, while others require more detailed accounting. The way CAM charges are calculated depends on what makes sense for the property owner and the particular piece of real estate.
According to the National Association of Realtors, the most common way CAM charges are calculated is by determining each tenant’s pro rata share of square footage in the property. Each tenant then pays their share of the property’s expenses based on the amount of space they occupy.
One way of doing this is to divide the total cost of the common area maintenance by the square footage of the property to get a cost per square foot (psf) for CAM charges.
CAM expenses / square footage of building = CAM charges psf
CAM expenses for the year: $100,000
Building size: 20,000 sf
$100,000 / 20,000 sf = $5 psf
$5 per square foot will then be added to each tenant’s rent to cover CAM charges.
Some leases will calculate CAM charges by dividing the CAM costs by the square footage of occupied space. Let’s say that same building used this method with a portion of the property being vacant.
CAM expenses for the year: $100,000
Occupied space: 12,000 sf
$100,000 / 12,000 sf = $8.33 psf
Since most of the maintenance costs are going to remain the same, even though only a portion of the building is occupied, each tenant’s share of expenses is significantly higher. This is obviously much more favorable to the landlord than it is to the tenants.
With some properties, the tenants don’t share use of the common areas equally. Tenants using less of the shared space may object to paying the same cost per square foot as the rest of the tenants. Dealing with this requires the landlord to determine which expenses each tenant should be responsible for and calculate the charges for each cost separately. A simpler way of dealing with this is to keep the CAM charges the same for everybody but charge a lower lease rate on the spaces that don’t have the same access to the common areas.
Charging CAM fees based on the total square footage each tenant occupies is one of the most common ways tenants are charged. It protects the landlord from fluctuations in costs and keeps the lease rate a bit lower for the tenant.
In some leases, the CAM charges are added into the rent by charging rent on a portion of the common area. Natalie Wainwright, VP of office tenant representation at LOGIC Commercial Real Estate, explains, “Landlords of a Class A product are more likely to offer a full-service gross lease, which will account for the CAM fees by including the common area.”
The common area is included in the rent as a load factor. The load factor calculates what percentage of the building is used as common area, then adds that same percentage to the usable square footage of the leased space. This gives you the rentable square footage, which is what the rent payment is based on.
Wainwright gives this example: “If a tenant is paying rent on a space based on 5,000 rentable square feet, but only has 4,500 of usable space, they are paying roughly 10% as a load factor.”
Building size: 100,000 sf
Common area space: 10,000 sf
10,000 sf common area / 100,000 sf total square footage = 10% common area
Usable square footage + 10% load factor = rentable square footage
Fixed CAM costs
Fixed CAM charges are becoming more common in commercial real estate leases. According to the International Council of Shopping Centers, several property managers and asset managers are seeing shopping malls simplifying their CAM fee structure by switching to fixed CAM charges due to demand from anchor tenants.
With fixed CAM charges, property owners set a flat fee for common area maintenance and usually add small annual increases to that fee to cover the cost of inflation. Tenants may still want to review the property expenses to ensure their CAM charges aren’t significantly higher than they should be.
Fixed CAM charges can either apply to property taxes and insurance as well as actual maintenance costs or only apply to maintenance costs while leaving the property taxes and insurance adjustable.
A fixed fee structure is more commonly offered by REITs as opposed to smaller independent investors. Smaller investors could be in trouble if expenses increased far beyond the set CAM charge, while larger REITs are able to absorb those costs more easily.
When the CAM charges are based on actual costs, a tenant might want to negotiate a cap on how much they will be required to pay for their share of common area maintenance. Putting a cap on CAM charges helps protect the tenant from their lease expenses increasing outside of their budget or having any sudden surprises at the beginning of the year. In turn, this adds some risk to the landlord to cover additional expenses themselves.
Adding a cap on CAM charges to a lease is often a part of negotiations between the tenant and landlord. The landlord may agree to capping the maintenance costs in order to get the lease rate they’re asking for.
Whatever else a tenant and landlord agree to
Unique situations may require costs to be calculated in a special way, and the method of calculating CAM charges may be different than what’s spelled out in the current lease terms of another tenant occupying space in the property. The landlord may agree to not include certain costs in the charges for one tenant or may even abate all or a portion of the CAM charges for a set period of time.