Start Talking Occupancy Cost—Even with Triple Net Leases

Ask most shopping center owners what rent their tenants pay per square foot, and they'll quickly respond with a base rent number. Ask them what tenants pay in Common Area Maintenance (CAM), property taxes, and insurance, and many won't know the answer with the same confidence.

That's because there has long been a belief that these are simply pass-through expenses. Since tenants reimburse them, many owners view them as having little impact on property performance. Instead, they focus almost exclusively on base rent, viewing it as the primary driver of NOI and asset value.

The problem is that tenants don't think that way.

While owners often focus on base rent, tenants focus on their total cost of occupancy—the combined cost of base rent, CAM, property taxes, and insurance. In most markets, there is a practical limit to what tenants are able to pay for occupancy. Whether that cost is paid through base rent or NNN expenses is often less important to the tenant than the total amount leaving their bank account each month.

None of this suggests that owners should abandon triple net leases in favor of gross leases. Triple net leases remain one of the most effective structures for allocating operating expenses and protecting NOI. The point is simply that owners should think about their properties the same way tenants do: in terms of total occupancy cost. Even in a triple net lease structure, higher NNN expenses can influence leasing decisions, achievable rents, and ultimately property value.

Consider two identical 10,000-square-foot shopping centers competing in the same market. Tenants are willing to pay a total occupancy cost of $45 per square foot.

Property A has NNN expenses of $10 per square foot, allowing it to achieve a base rent of $35 per square foot.

Property B has NNN expenses of $15 per square foot, limiting it to a base rent of $30 per square foot.

Although tenants pay the same total occupancy cost at both properties, Property A generates an additional $50,000 in annual rental income. At a 6% capitalization rate, that difference translates into approximately $833,000 of additional property value.

This is where many owners and property managers miss the connection. Higher NNN expenses can place downward pressure on rents, while lower NNN expenses can create room for higher rents and stronger property values. Viewed through that lens, operating expenses are not merely pass-through costs—they are a factor that influences leasing competitiveness, rental rates, and asset value.

In commercial real estate, increasing value is not always about charging more rent. Often, it is about managing NNN expenses efficiently enough to allow the market to support more rent.

About Rozzi Management

Rozzi Management specializes in the management of retail shopping centers and flex industrial properties. To discuss a property, contact Rozzi Management at (720) 541-7692 or visit www.rozzimanagement.com.