A net charge (NNN) is a type of charge that comes in conjunction with a net lease that requires the tenant to take on some of the expenses which would typically be paid by the owner. If you are a broker and are representing an owner, a net charge is the owner’s best friend. If you are representing a tenant it is something to be made sure to be regulated or avoided altogether.
What Does a Net Charge (NNN) Usually Include?
Basic net charges typically include taxes, maintenance, insurance, waste management, HOA fees, repairs, and other possibilities as defined by the ownership. The net charge is such a favorable tool for an owner of a property – it is typically not defined what else can be included with a net charge.
Tenant’s Perspective on Net Charges
Let’s say the owner elects for a consultant to come and work on the property. This cost can transfer directly to the tenant, unless there is a cap to the net charges (NNN). When representing a tenant that has a net charge it is very important that I see exactly what the net charges are, what they cover, and how they are regulated.
In my experience most tenants, brokers, and owners rarely put a cap on what triple nets can be defined as, and how they can change over time. When representing a tenant I want to make sure that regardless of the repairs/upgrades that the owner decides to do on the property, I do not want my client to incur endless fees as the result of a net charge. What I try to do is to add an addendum to the contract as to the dollar amount which cannot be exceed a certain threshold for any net charge.
Owner’s Perspective on Net Charges
Real estate is an investment. Often times property owners see real estate as a low risk asset (unlike other investment vehicles). I personally know a lot of owners who aren’t hands on in their investment. They don’t want to be a full time real estate investor and want to sit back and collect passive income. Therefore when they purchase their asset and are looking for a tenant, they don’t want to have to worry about their investment. They would like the tenant to incur all costs because they are the ones who are occupying the space. If the owner purchases something like a strip mall or an industrial complex they hopefully have purchased the property with net charges (NNN) in mind. Net charges are another real estate lease tool, which have to be analyzed and accounted for when the owner calculates the return on their investment.
In conclusion, when representing a tenant make sure that if the building qualifies for a net charge (if it is a newly constructed or has tenants with common area expenses). Then, make sure that you define and cap the net charges. When representing an owner try to push for a net charge but don’t make it unfair for the tenant.
Commercial Real Estate Terminology
If you come across any commercial real estate lease terminology you are unfamiliar with, you can always visit our Glossary of Commercial Real Estate Terms to find out what they mean.
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This article was written by Digsy Partner, Yan R. Tkash.