Whether or not CAM(common area maintenance) fees are charged to the tenant depends on the type of lease that was signed. The terms below may mean slightly different things from one market to another, but these are the basic terms and costs associated with the different lease types.
Triple net lease, or NNN lease
In a triple net lease, the tenant pays CAM charges and takes on almost all responsibilities. The tenant pays their pro rata share of the property taxes, property insurance, and common area maintenance. Typically, the only responsibility the landlord has is paying for capital expenditures. Capital expenditures, in this case, refers to improvements or repairs made to the building, land, or parking lot.
Some expenses may vary a bit, depending on what the tenant and landlord agree on during lease negotiations. For example, in many cases the tenant is only responsible for HVAC repairs up to a certain dollar amount per year. This is called a “stop.” It’s similar to an insurance deductible.
Most retail properties have triple net leases, including restaurants, strip malls, shopping centers, and single-tenant properties. Real estate investment trusts (REITs) and other investors usually prefer to purchase properties with triple net leases in place due to the stability of the net cash flow.
Net net lease, or NN lease
In a net net lease, the tenant pays their share of property taxes and property insurance. The landlord pays for all the common area maintenance. This type of lease is less common than a triple net lease, but it has its advantages in some situations. This type of lease may be attractive to potential tenants because it minimizes their risk. A net net lease is also more common when the common area expenses are shared among multiple properties within an investor’s portfolio.
A net net lease will usually have a slightly higher base rent than a triple net lease since the landlord has more expenses to cover.
A net lease isn’t a commonly used lease. This type of lease only requires the tenant to pay their share of the property taxes while the landlord covers the cost of property insurance and common area maintenance.
A net lease normally has a higher lease rate than a net net lease, usually even higher than a triple net lease.
When a landlord covers the costs of property taxes, insurance, and common area maintenance costs, it’s referred to as a gross lease. This is a very common type of lease in office buildings. The gross lease simply requires the tenant to pay a flat rental rate without fluctuations in property taxes, insurance rates, maintenance costs, or other operating expenses from one year to the next.
The landlord will even cover the tenant’s utilities in a lot of gross leases, and some will even go as far as paying their tenants’ janitorial costs.
The above descriptions are the common terms for these lease types, but terms can vary greatly from one lease to another. Some markets also have slightly different standards on how expenses are shared between landlords and tenants. Since triple net leases are the most common type of lease that passes costs on to the tenant, they will commonly be referred to simply as a net lease — which can create confusion. It’s important for everybody involved in the lease to fully understand exactly what they’re paying for.
A property owner has to structure their leases in a way that maximizes their return on investment. While passing CAM charges on to the tenant is often considered the most favorable lease for the landlord, the operating costs on a particular property may provide a higher return with a gross, net, or net net lease.