If your business has a triple net (NNN) lease, you will receive a reconciliation letter from your landlord usually by the end of the first quarter after the calendar year ends. The purpose of this letter is to reconcile the estimated monthly payments made during the prior year with the actual expenses incurred for common area maintenance (CAM), building insurance, and real estate taxes. Here are some things to look for in your letter.
- Proper receipt of payments. The letter should clearly state the amount you paid toward NNN expenses, and you should be able to verify this with your own payment records.
- Sufficient explanation of expenses. The letter should itemize the NNN costs in sufficient detail that you can get a sense of whether the costs are consistent with the items allowed per your lease. If the reconciliation letter only includes a lumpsum total or very limited detail (such as only having line items for CAM, insurance, and taxes), you should contact your landlord or property manager to get more information.
- Proper allocation of expenses. The basis for allocating NNN expenses across tenants will generally be based on the ratio of the square footage leased compared to the overall square footage of the building. These values should be identified in your lease, so you can compare to make sure the basis of allocation is correct.
- Calculation of overpayment/underpayment. Confirm that the calculation of the difference between your estimated payments and the actual prorated expenses is correct. If you have overpaid, you should expect a credit toward your upcoming payments. If you have underpaid, you will owe this additional amount to your landlord.
- Adjustment of estimated payment. Your estimated monthly payment for NNN expenses may be adjusted, particularly if the prior estimate was significantly different than the actual costs incurred. Carefully review the adjustment to ensure it makes sense and is consistent with any limits on increases that may be specified in your lease.
Questions about NNN reconciliations are common and your landlord or property manager should be able to assist in helping you understand the reconciliation letter. However, if you are still unsure about how to interpret the information given or need assistance obtaining information, you may also want to consider hiring a firm that performs NNN reconciliation audits to perform the review on your behalf.