Triple Net (NNN) and Operating Expense Reconciliation Statement Missteps
By James (Jay) Rigelsky on Nov 8, 2018
Challenge the Call-Triple Net (NNN) and Operating Expense Reconciliation Statement Missteps; How the “Right” Review Keeps You in the Green
It is that time of year again, when the leaves are changing, MLB playoffs are wrapping up, NFL is in full swing, and Fantasy Football players are either rolling in wins, or planning next year’s draft location.
What is your Landlord up to?
Well, your Landlord is starting to reconcile 4th quarter operating expenses (NNN), preparing to pay property taxes, send you next year’s triple net (NNN) estimates, and bill you for the difference in NNN expenses.
We know that nothing will knock you off that mountain-high fall feeling faster than a NNN operating reconciliation bill (payment due) from your Landlord. That’s why we are going to help you understand the true meaning of a NNN lease, what NNN operating reconciliation means to you, as well as how to minimize your out of pocket costs and get back to focusing on that 7 game World Series, winning your Fantasy League or booking your college football playoff destination.
The NNN, typically referred to as a “triple net lease,” is the preferred lease structure among industrial, manufacturing retail pad sites, and retail landlords/owners.
It is so named because each “N” represents a “net” – the actual cost – for three areas of operating expenses: property taxes, maintenance, and insurance. The NNN lease has also been making its way into the office market. Landlords prefer using a NNN lease structure because it provides them with a tailored profit structure, with the tenant or user 100% responsible for paying any operating expenses (NNN).
In my 18 years of working commercial real estate, I have never seen a landlord reimburse a tenant or user prior to first sending a bill outlining all the operating expenses a tenant is responsible for at the end of a lease year. Most landlords are not intentionally trying to overbill you, but they are in the business of obtaining the highest return possible on their investment, and that means billing for every single expense a landlord can pass through to their tenants, often outlined to a tenant in the form of a minimally detailed operating expense reconciliation statement. There are lines with numbers, and what seem to be viable expense explanations. The reconciliation statement is much like the new targeting call in college football and the NFL: It is reviewable, but if you only look at it for 30 seconds, can you really determine if the hit was a penalty or if you actually owe your landlord money?
Landlords prefer that you accept what they believe are reasonable expense reimbursements and pay the reconciliation charge. Believe it or not, just like umpires, officials, or the flopping soccer player, landlords make mistakes and accounting errors.
You as a tenant can either choose to accept the statement as-is, or challenge the call.
Tenant representatives are here to help you challenge the call, and ensure you are not paying more than you are supposed to as a tenant.
Depending on the size of your warehouse, manufacturing location, or distribution hub, the overbilling of operating expenses does inevitably occur, and a proper review could potentially save you thousands to tens of thousands of dollars.
The landlord has the right to bill you for all reimbursable expenses, but the landlord also has the obligation to bill those expenses in accordance with generally accepted accounting principles. Depending on the age of your warehouse, manufacturing location, or distribution hub, and the language in the lease, some expenses are considered yearly expenses or capital expenditures and should be billed accordingly.
Capital expenditures are items like repairing/replacing the roof or an HVAC system. Other operating expenses such as janitorial, landscaping, ice removal, and parking lot maintenance are controllable expenses. Capital expenditures should be funded over a period of time (the “useful life” of the improvement), controllable expenses are annual expenses, and uncontrollable expenses (property taxes, insurance, and utilities) are expenses that you pay to the landlord as billed. It is your responsibility as a tenant to hold the landlord accountable and question the operating expense reconciliation statement to ensure each NNN expense previously mentioned is properly billed to you.
The operating expense reconciliation statement review can be a daunting task, but the good news is we are here to help you for free.
We will take the necessary time to analyze your lease, and make sure that simple terms like “triple net (NNN)”, “net plus electric,” or “base year” — which are frequently used by brokers and landlords — do not conflict with the actual terms of your lease. More importantly, we will make sure that you as the tenant are being billed properly, and not paying the landlord more than they are entitled per the lease.
Preparing for the college football playoffs, making fantasy trades to win your league, and focusing on your March Madness bracket are all much better uses of your time than worrying if the NNN operating expense reconciliation statement you received is correct.
So throw that challenge flag and let us review your NNN operating expense reconciliation statement – keeping you in the game and focused on maximizing your business’ returns. After all, staying in the game is much better than hitting the showers early.