When you want to lease commercial real estate in California, triple net (NNN) leases are the standard. You pay for the base rent along with the three nets each month, which are property taxes, insurance and maintenance costs.
However, what looks simple on paper can become complicated in practice. You might get stuck with hidden charges that are not clearly defined or properly capped. By identifying the risks early, you can approach potential deals from a place of informed negotiation.
The property tax spike
Under California’s Proposition 13, property taxes are often reassessed upon a change of ownership. If the landlord sells the building during your lease term, the property taxes could skyrocket.
When that happens, it can lead to an unexpected and unsustainable increase in your monthly expenses. You can negotiate a Prop 13 protection clause that caps annual tax pass-throughs or limits increases to a fixed percentage, regardless of the building’s sale price.
Ambiguous upkeep clauses
NNN leases often require tenants to handle all repairs, with provisions detailing what kinds of maintenance you have to pay for. Without clear terms, you risk being responsible for capital expenditures like a full roof replacement or HVAC overhaul.
Before signing the lease, you may want to check if the contract specifies if you will only cover routine maintenance or if capital expenditures are also included. That way you can ensure that you only pay for the portion of upkeep that your business will benefit from as well.
Insurance premium increases
In an NNN lease, you reimburse the landlord for their property insurance, on top of your own policies for your business. You may want to keep these payments separate to track them more easily. A lawyer can also help you negotiate an annual cap on insurance cost pass-through increases.
Securing your bottom line
A well-structured NNN lease can work in your favor when you proactively review the rental agreement and clearly define your financial responsibilities. Taking these steps before signing the lease contract helps you transform a potential liability into a manageable business expense.