NNN Reconciliation

When Fair Leasing Terms Are A Workout


24/7 Fitness Clubs and Tenant NNN Obligations – A Closer Look

By Rick Tannenbaum

Let’s say you’ve been operating your 2000sf insurance or brokerage office in a 40,000sf neighborhood shopping center and your contributions for CAM and INS have been about $3.00/psf. Your lease specifies that your share of NNN expenses, based purely on your square footage, is 5% rick Tannenbaum(2,000sf/40,000sf = 5%). You see about a dozen customers a day who stop by to renew a policy or make a payment. Your combined CAM and INS expense is $500/month (2,000sf x $3.00/sf = $6,000 per year or $500 per month).

A few months ago, your Landlord rented 10,000 square feet to a 24-hour, 7-day a week fitness club with several thousand members. Where the parking lot lights used to shut off at 9 pm, they now burn all night. The trash barrels are always stuffed full and the maintenance company now comes more than once a day to empty the barrels. The parking lot is littered with single use water bottles and the sweeping company that used to come three times a week, now comes every night and has to constantly maneuver around parked cars to clean the lot. The striping done last year is already wearing thin and the bi-annual striping will now likely have to be done annually. Bulbs in the parking lot lights will burn out more regularly, and every time you see that lift truck on the premises to change bulbs, your wallet screams. Insurance premiums will also likely rise on its renewal with the added risk of slips and falls and other accidents in the parking lot.

You fear your next annual adjustment and know that pass-through operating costs may go up 50% or even 100%.

You check your lease and see there is no weighted usage clause – a clause that apportions NNN charges based on usage instead of square feet. There are no provisions for adjustments or provisions to vary your share in a manner other than square footage. Your lawyer/broker did not negotiate a cap on expense growth (where certain CAM expenses cannot increase more than a designated percentage over the prior year or base year amount).

And, you also did not negotiate a methodology to apportion CAM in a manner that considers those added expenses that either benefit tenants unequally or that are caused by other tenants such that the tenants causing the extra expenses pay more than those light users (like your small insurance office or the retail optometrist next door). You fear your next annual adjustment and know that pass-through operating costs may go up 50% or even 100%.

You can open a dialog with your Landlord or management company. Explain that the changed circumstances are grounds for an adjustment to your lease terms. Explain that it is the “bad behavior” of the fitness tenant (littering, inadequate trash containers inside its premises) that is causing the CAM expenses to increase. Explain that the shopping center always closed at 9 pm and that the changed circumstances (the 24-hour, 7-day a week fitness club) are the sole cause of the requirement for the all night lighting, the wear and tear on the striping and parking lot, and the premature need to change bulbs.

The problem you are likely to encounter is that all of the Landlord’s leases (including the fitness center) likely apportion NNN charges by square footage so any CAM or INS break he gives you cannot be made up by the other tenants – those extra charges come out of the Landlord’s pocket. The landlord will tell you that your business will benefit by the extra traffic and the extra costs are a small price to pay for the increase in customers (even though most of the traffic at the fitness center is early the morning or early in the evening when your office is not open). The best you could probably hope for is to insist the Landlord require the fitness center to install trash barrels inside its premises and to ask it to be more diligent about its members discarding trash in the parking lot. Most shopping center rules impose some restrictions on tenants’ customer behavior.

There is a valuable lesson here to be learned. The only opportunity you have to affect change is likely to be when you renegotiate your lease at renewal or when your options are available. Engage an experienced consultant, lawyer or broker to help you next time.

The real lesson though is for Landlords who lease to 24/7 fitness clubs – be considerate of your existing tenants and make provisions that are fair to them and squarely place the burden of increased operating costs on the tenant responsible for the increase. A quality tenant is a valuable asset – steps should be taken not to drive them away.

Rick Tannenbaum runs a real estate advisory service for investors, and is a strategic planner and analyst. Reach him at rick.tannenbaum@live.com

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