NNN RATES ON THE RISE IN THE UPPER VALLEY

FIRST THING'S FIRST:

For those of you that are unfamiliar with the acronym "NNN" it refers to the term Triple Net which is a Common Area Maintenance (CAM) charge for commercial properties.  This is an additional cost to Base Rent and includes pro-rata shares for expenses of the property such as real estate taxes, insurance, grounds maintenance, rubbish removal, common electricity, etc.

NNN RATES ON THE RISE IN THE UPPER VALLEY:

 As having now completed our CAM reconciliations for 2008, it is clear that the cost of living is on the rise in the Upper Valley.  I will provide an overview of the actual increases as well as explain what we are doing as owners and managers to keep these costs down.

Lebanon and Hanover have both seen dramatic increases in the cost of living, primarily in real estate taxes and heating fuel however, with gasoline having climbed as high as it did, this drove every other service-related cost up as well, especially grounds maintenance (the added stress of having a big snow year also contributed to this expense).  Moreover, the cost of electricity unexpectedly doubled in July last year and there was a huge increase of the cost of water and sewer services.

 Lebanon at a glance:                  2007 Rate/ft² = $8.60                 2008 Rate/ft² = $8.91

Hanover at a glance:                  2008 Rate/ft² = $6.51                 2008 Rate/ft² = $8.32

So what's a commercial property owner/manager to do?  The global economy has put enough stress on every business, even those in the "sheltered" Upper Valley, so increasing NNN rates doubles the pressure.  With NNN rates so high and market value not high enough, that means owners have to lower their base rent prices, driving the market value even lower.  High NNN costs hurt Landlords and Tenants, it lowers marketability and stresses already stressed tenants to the brink of move-out.

 Our company, Lebanon Property Management has taken the following actions to help ease some of this NNN tension, and we would recommend any other Owner/Landlord to discuss their options with their Property Managers to see if any of these options are viable for you if you are in a similar situation.  (The following does not appear in any special order but are all options that we have tried)

 •·             NNN cap for one year (or more)- This provides for a ceiling on cost of living increases.  Often this option is exercised on Base Rent increases but can certainly be used for NNN as well.  You can exercise this option in two ways: The first is to say that NNN will not be increased more than X% over the prior year.  The second option is to say that NNN will not go above $X per square foot.

•·             Renegotiate the lease (early) - This may be a less desirable alternative as you would likely be reducing your Base Rent (or NNN) rates.  Be aware that by reducing Base Rent, you will be affecting the value of the building (both for tax purposes and marketability) so you will want to consider this option carefully before exercising.  You could also consider extending the term in turn for reducing the base rate, in this case at least you will have a tenant for a longer period during this time of uncertainty.

•·             Reducing specific expenses - In this case you would outline specific expenses that you are willing to take a hit on, most often management fees, legal & professional fees, wages, taxes, or other fees are the expenses that you would be willing to consider reduction on, if at all.

•·             Proactively reduce expenses - For us, grounds maintenance had doubled in one year, so we took it upon ourselves to find a new service provider that would perform the same services for less AND we signed a contract stating such.  This is an area you have to be very careful about as you do not want to compromise the quality of services being provided but in certain instances you can find a situation where you won't have to compromise anything AND still save money just by changing providers.  This won't change the past year but it will show your tenants that you care and give you a lower projection for next year.

In closing, we as owners/managers understand the pain that tenants are feeling right now.  High NNN costs not only hurt existing businesses (which of course we don't want to loose) but it prevents new business from entering certain market areas.  When new businesses choose a lesser visible area due to the fact that they cannot afford the area of choice, they are unable to draw the traffic they need to grow their business and they grow stagnant as well.  NNN rates are on the rise and we as professionals should know how to advise our clients to negotiate so that everyone can wade through this tough time so that we can all make it to calmer waters!