January 23, 2019
When deciding whether or not to lease an apartment, one can usually be certain that the advertised rent reflects the entire amount to be paid to the landlord each month. The landlord charges a flat rate intended to cover all of the landlord’s costs of operating the rental. In this instance, the landlord assumes the risk of operating, maintenance, taxes and other costs that exceed revenues from rent.
In a commercial lease, the opposite usually applies. Most leases include a net rent structure (sometimes referred to as NNN or triple net), where rent does not reflect (or is net of) the landlord’s operating expenses (including common area maintenance (CAM), repairs, and utilities), real estate taxes, and insurance. Hence, rent is net of these three lines of expenses, and the tenant pays a separate charge to the landlord to cover the expenses.
The separate charge may be billed to the tenant once per year after the landlord knows its exact costs. But more likely, the landlord will require the tenant to pay a monthly amount based on the landlord’s estimate of actual costs. Once the landlord knows its actual costs, the landlord will reconcile the costs with the tenant’s estimated payments, and the tenant is either billed an additional amount because estimated payments were too low or issued a credit because the estimated payments exceeded actual costs. The reconciliation usually occurs once per year.
As you can see, net leases may result in hefty additional rent and expenses that are both unforeseen and uncontrollable by the tenant. To soften the blow and avoid surprises, tenants may want to keep the following in mind.
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