Expert: Mike Fortunato - 1/29/2010

Question
Hi,

I have a question about TI's and NNN leases.

1. When an owner says he will give $20/SF for TI's does that mean he will pay $20/SF towards customizing the rentable area to our needs?  Do we have to pay this back or is this completely "free" for us?  What happens if we leave after our lease?  Does the owner have to demolition everything and start over or does TI's usually pertain to property that is selling rather than leasing?   

2. How exactly does a NNN work?  I know an absolute NNN the tenant basically pays for EVERYTHING.  However, does the owner pay all the expenses each month and then ask for a reimbursement at the end of the year? month? Does he ask for the expenses each month prior to the due date?  Basically, how does the owner get the NNN expenses from the tenant?  

THANKS!
Michael  

Answer
1.  A TI allowance is normally what the landlord will pay towards the improvements necessary to make the space available for the tenant's occupancy. It usually is not paid back, although sometimes the costs can be amortized over the lease term and added on to the rental rate. But if that's the case, it should be disclosed during negotiations. The improvements will remain with the building when your tenancy expires, although they may or may not be usable to a new tenant.

2.  In most NNN situations for multi-tenant retail buildings, the tenants are billed monthly estimates, and then these estimates are reconciled against actual expenses at the end of each calendar year, and the appropriate adjustments are made for the following year. The NNN includes your prorata share of CAM (common area maintenance), real estate taxes, and insurance. In some instances, a landlord will bill for actual expenses each month or each quarter, but to even the cash flow out, most use the monthly estimated process as i outlined above. Your lease should detail exactly what is included, and how everything gets billed.