When evaluating a commercial lease or investment opportunity, understanding how operating expenses are structured is critical. However, the terminology surrounding NNN (Triple Net) expenses and CAMs (Common Area Maintenance) is often misunderstood. Whether you’re a tenant, landlord, or investor, it’s essential to understand how these expenses are defined, billed, reconciled, and capped, especially in an environment of rising costs and evolving tax policies.
NNNs vs. CAMs: What’s the Difference?
A true NNN lease requires the tenant to reimburse the landlord for three main cost categories: property taxes, property insurance, and common area maintenance (CAM) expenses. However, it’s not unusual for people to use “CAMs” as a catch-all phrase to describe all of these expenses — leading to confusion when negotiating lease terms with new tenants.
- CAMs typically include shared services such as landscaping, janitorial work, property management, common area repairs, and security.
- NNNs refer collectively to CAMs plus property taxes and property insurance.
- An absolute net lease takes it a step further, placing full responsibility for all expenses — including capital improvements and structural repairs — on the tenant.
This doesn’t mean a tenant with a five-year lease is on the hook for the full cost of a capital improvement like a new roof. Capital expenditures are typically amortized over their useful life. For instance, a roof might have a useful life of 39 years. If the roof costs $30,000, the annual amortized cost is about $769 — or roughly $64 per month. In a multi-tenant property, that cost is further divided based on each tenant’s proportionate share of the total square footage. As a result, capital improvements usually equate to only a few additional dollars per month in rent.
How NNN Reconciliations Work
NNN reconciliations are typically completed within 90 days of year-end. This allows the landlord time to finalize actual expenses and compare them to the estimates billed throughout the year. If tenants underpaid, they owe the difference; if they overpaid, they receive a credit.
Reconciliations are generally retroactive to January 1, but lease language determines how any overages or credits are handled in the first three months.
Can Charges Be Capped?
Yes — many leases include caps on controllable expenses. These caps typically allow for annual increases in the range of 3% to 5% and apply to items that landlords can directly influence or competitively bid out, such as:
- Landscaping
- Janitorial services
- Property management fees
- Security contracts
However, non-controllable expenses — like property taxes, insurance, and utilities — are generally not subject to caps. This becomes especially important in times of inflation, labor shortages, or supply chain issues when these costs can spike unexpectedly.
What’s Driving NNN Increases Today?
Across the board, operating expenses have risen sharply over the past few years:
- Utilities: Water, sewer, and energy costs have climbed, driven by infrastructure fees and municipal rate hikes.
- Labor costs: Service providers such as HVAC technicians, landscapers, and snow removal crews are charging higher rates due to increased labor costs and staffing shortages.
- Insurance: Older buildings, especially those with aging roofs or deferred maintenance, are seeing either premium hikes or policy non-renewals.
- Property taxes: In some states like Oregon, statutory caps (such as Measure 50) limit annual increases to 3% — unless a property is sold or reclassified. However, non-capped items like bond levies or special assessments can still cause tax bills to surge unexpectedly.
Operating expenses are increasing 10–15% annually, outpacing standard inflation. As a result, landlords and property managers are rebidding service contracts annually just to keep costs in check.
Property Tax Surprises and Exemptions
One of the more surprising shifts occurs when a property transitions from nonprofit (501(c)(3)) to for-profit use. For instance, two identical buildings — one occupied by a nonprofit and the other by a for-profit — can end up with vastly different property tax liabilities. The building occupied by a nonprofit tenant may be exempt from property taxes but once that tenant vacates, the property loses its exemption and is reassessed at full market value — without the 3% cap on increases that a for-profit tenant will have benefited from over the same time period.
Over a five-year period, the for-profit property will only see a 15% increase in assessed value (3% annually), while the formerly exempt building could experience a 45% or greater jump due to reassessment.
Buyers need clarity around how the property is currently assessed and consult with the assessor to understand how taxes will be recalculated post-sale.
Buying or Selling a Property with NNN Leases? Due Diligence Is Critical
Whether buying or selling property with NNN leases in place, thorough due diligence is non-negotiable. Key steps include:
- Reviewing historical operating expenses and reconciliations
- Understanding which expenses are being recovered under the lease
- Evaluating timing within the calendar year to determine which party is responsible for pre-closing or post-closing reconciliations
If outstanding credits are owed to the tenants after close of escrow the buyer may become liable for a year-end reconciliation credit even if the buyer did not collect any of the NNN charges. Structuring a sale agreement and escrow appropriately is key to avoiding financial surprises.
The Bottom Line
NNN leases can offer predictability and reduced management burden for landlords, while providing tenants transparency into the cost of operating a building.
Tenants should clearly understand their obligations beyond base rent. For owners and investors, proper management of NNN structures, reconciliations, and property tax strategies can protect long-term value and minimize surprises.
In a climate of rising costs and evolving tax policies, there has never been a more important time to dig deep into lease terms. Hiring a skilled property manager can alleviate the burden of budgeting, reconciling expenses, negotiating vendor contracts, and managing expectations, ensuring smooth and efficient operations and the longevity of well-performing asset year over year.
