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Leases Property Management

Are you ready for your NNN reconciliation?

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.

Categories
Leases Property Management

Common Area Maintenance (CAM) Charges

Aside from the base rent, common area maintenance (CAM) charges are some of the largest additional leasing costs that tenants may see. Here, we give an overview of what CAM charges are and ways to manage them.

What are Common Area Maintenance (CAM) Charges?

In a triple net (NNN) lease, tenants are billed CAM charges for maintenance fees to their property’s common areas. This is an additional fee on top of the base rent you’ve already agreed to pay.

What Can Be Included in CAM?

CAM charges could be overgeneralized by looking at all the features in your building that benefit your rented space. Chances are most of the features you think about can be applied to CAM.

We can break this down into inside and outside features of a commercial property. On the outside of the building, you can assume non-structural repair and maintenance of the roof, landscape, and parking surfaces to be covered by CAM. That includes snow removal, landscape, lighting, and signs. On the inside of the commercial property there’s plumbing, electrical, and cleaning services, which could also include all of the cleaning supplies.

What Are Capital Expenditures and Why Do They Matter?

When you’re leasing a property, you don’t own it so there’s no advantage in increasing the value of the property. However, there’s always a chance that a landlord will try to add these into CAM charges.

This is when understanding what benefits your business is key to negotiations. It’s even more important to have someone you trust that knows your business to help determine what – if any – capital expenditures are covered in CAM charges. The reason why there’s conflict surrounding these improvements is because of the nature of the capital expenditures.

There are typically three categories of capital expenditures: capital improvements, capital replacements, and capital repairs. As you read through these, you’ll start to understand why most of these should stay out of CAM fees.

Capital Improvements, Capital Replacements, and Capital Repairs

These can be defined as additions or improvements that increase the value of the commercial property. Capital improvements can include everything from new structures, equipment, or other improvements which most tenants will find objectionable. Capital replacements are investments that upgrade depreciated assets, and capital repairs are maintenance to keep capital assets in a working condition.

All three of these capital expenditures can be seen as investments into the commercial property, but there are times when they’re included into CAM charges. For example, if there was an upgrade to the HVAC system, or electrical system that would lower the tenant’s utility charges, then there would be some benefit to the tenant. Even with that example, prospective tenants should make sure those terms are specifically outlined in their contract.

Remember, we’re just scratching the surface with these topics and if you’re searching for a new lease, make sure you work with a tenant representative to protect yourself from potential risks and liabilities.

How CAM Charges Add Up

Usually your landlord of the commercial property will give you a prorated fee based on the square footage of your rented space. Accurately estimating yearly CAM charges can get complicated because it’s difficult to predict cash flow. Depending on your commercial property, your landlord may include a cap or floor on CAM charges.

CAM Caps and Floors

Caps and floors are included in some leases to limit CAM charges to a fixed value. This can help both the landlord and the tenant as cash flow varies from month-to-month and year-to-year.

A cap on CAM fees would limit the amount paid by the tenant to a fixed price that can rise each year. CAM caps increases are percentages that can be cumulative or compounded, and calculated year-over-base or year-over-year.

When CAM charges are less than the cap, then a landlord may use a floor CAM. These CAM charges will budget a minimum increase in the fees, which may slow down any major increases in the future.

CAM Audits

Since common area maintenance is under the control of the landlord, it’s important for tenants to ensure they have a right to audit the expenses to ensure they are fair and equitable. In addition to reviewing the annual CAM reconciliation report that the landlord will send, tenants should also ensure that their lease provides for the ability to obtain copies of invoices and review for accuracy.

Still Have Questions?

Making sure that tenants are comfortable with all terms of their lease is one of our highest priorities. Contact one of our agents at (402) 421-7474 with any CAM questions you may have.