Are capital expenditures normally included in NNN charges?

In Leasing Property - Asked by Tammy K. - Jul 11, 2009
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Answer(s)

Paul S.
Broker/Agent
Glendora, CA

If the lease is a pure NNN then capital improvements should be the responsibility of the tenant. That said you should look to the lease to see if capital improvements are specifically mentioned and if so how they are handled? Franchisee's often have to upgrade the facility as part of the franchise agreement. If there is nothing in the lease that addresses that situation, and the lease is pure NNN, the tenant is most likely on the hook for the upgrades? I have a client that owned an older Taco Bell on a NNN lease. The tenant tore down the old building and replaced it with a new one at the tenant's expense. Upgrade requirements by the franchise can be the reason sites go dark if the franchisee is not doing enough business at a site to justify the cost of the upgrades. The upgrades can be major capital improvements.

Jul 14, 2009
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Jeff B.
Broker/Agent
Nipomo, CA

The answer to this question really depends on a number of factors. Are you a landlord preparing NNN charges for your tenant(s), or are you a tenant questioning the landlord's NNN charges? In these cases, then "you should look to the lease to see if capital improvements are specifically mentioned and if so how they are handled" as mentioned by Paul S from Glendora. Are you a landlord or tenant negotiating a lease? If so, then it would be prudent to survey comparable space in your marketplace to see how NNN's are "normally" handled. Local commercial brokers who are active in your marketplace may be able to give you more detailed insight into the customary practices in your area. In some markets, you will see different methods used depending on the property type, one for industrial properties, another for office properties, still another for retail properties. You may be surprised to see a variety of methods used even in the case of similar property types. There are some more sophisticated commercial real estate associations that for some time now have been preparing "boiler plate," fill-in-the-blanks lease documents. An example is the American Industrial Real Estate Association in Southern California that has prepared tailor-made forms specifically for industrial and commercial properties and which are used for gross, modified gross, or NNN leases. If you are a landlord negotiating with a prospective tenant for a small retail space, you may find the tenant resistant to anything other than a lease with stipulated, fixed rental charges. Or if you are negotiating with a major national retail chain for "big box" space, you may find that the tenant already has an established lease form that they insist on using. In either case, it is worth remembering that everything may be negotiable. It just depends on how important the individual issues are to the respective parties in order to come to an agreement.

Jul 14, 2009
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