For starters, the expenses that make up NNN are Taxes, Insurance & Common Area Maintenance – meaning base rent is “net” to the landlord and variable expenses live outside the base rent. Sometimes landlords and brokers will inaccurately call them “Cams” or “Nets” which are inaccurate terms. A lot of times lease rates are described as NNN no matter what kind of base rent + expense pass through is offered, it could be the actual NNN expenses or all the expenses including utilities and janitorial.
Base rents and growth are described in the lease. Because expenses are variable, landlords budget expenses, pass through the budgeted expenses, true the expenses at the end of year, and send a bill for the overage in the following year. In an industrial setting, tenants contract directly for utilities and janitorial.
Full-Service Gross (FSG)
This is the most common structure for space in an office building. The lease will describe the FSG rent, and how the entire rent grows year to year. The lease will set a “base year expense stop”, which means that any time actual expenses are more than the base year, those incremental expenses are passed through as additional rent. This potentially means that the expenses grow two ways, so be careful.
This is an increasingly popular rent structure for space in an office building. Like the Industrial NNN structure, base rents are described in the lease and will change year to year as described. However, the difference is that all of the additional occupancy costs are budgeted and passed through including utilities and janitorial.
It’s important to get professional advice and manage your base year expenses where it’s used in the lease. And when you’re budgeting future rents, make sure that in some way your budget is built with the understanding that expenses are likely to grow in line with the Consumer Price Index.
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