NNN stands for triple net: the tenant pays base rent plus three nets — property taxes, insurance, and common area maintenance. The landlord's revenue is "net" of these expenses. The tenant bears the cost.
NNN leases are the most common structure in commercial real estate. They are also the most common source of reconciliation errors. The three nets have different rules, different timing, and different calculation methods. A single lease can have three different recovery mechanisms.
This article explains how NNN reconciliation works, where it fails, and how to automate it.
The Three Nets
Net 1: Property Taxes
Property taxes are the largest and most volatile of the three nets. They change annually based on assessed value and millage rates. They are not controllable by the landlord or the tenant.
Recovery methods:
- Full pass-through: The tenant pays their pro-rata share of the actual tax bill
- Base year: The tenant pays their share of taxes above a base year amount
- Cap: The tenant pays their share subject to a cap on increases
- Fixed amount: The tenant pays a fixed tax amount regardless of actual taxes
Common errors:
- The base year is wrong
- The cap is not applied
- The tax bill is not allocated to the correct period
- A reassessment after a sale is not passed through when the lease allows it
Net 2: Insurance
Insurance includes property insurance, liability insurance, and sometimes flood or earthquake coverage. Premiums change annually based on market conditions and claims history.
Recovery methods:
- Full pass-through: The tenant pays their pro-rata share of actual premiums
- Base year: The tenant pays increases over a base year
- Cap: The tenant pays subject to a cap on increases
Common errors:
- The premium is allocated to the wrong policy period
- A mid-year premium increase is not prorated
- The base year is not updated when the lease renews
- Flood insurance is included when the lease excludes it
Net 3: CAM (Common Area Maintenance)
CAM is the most complex net. It includes the operating expenses defined by the lease: landscaping, parking lot maintenance, common area utilities, security, janitorial, management fees, and repairs.
Recovery methods:
- Full pass-through: The tenant pays their pro-rata share of actual expenses
- Controllable cap: The tenant pays subject to a cap on controllable expenses
- Gross-up: Variable expenses are adjusted to full occupancy
- Fixed CAM: The tenant pays a fixed CAM amount with periodic adjustments
Common errors:
- Recoverable expenses are misclassified as non-recoverable
- The cap is not applied or is applied with the wrong base year
- The gross-up is not calculated
- Exclusions are not removed from the pool
The Annual True-Up Process
NNN reconciliation is done annually. The process follows this pattern:
Step 1: Aggregate the actual expenses. Collect all tax bills, insurance premiums, and CAM expenses for the year.
Step 2: Apply the lease rules. For each tenant, determine the recovery method, the base year, the cap, and the exclusions.
Step 3: Calculate the tenant's share. Multiply the recoverable amount by the tenant's pro-rata percentage.
Step 4: Compare to estimated payments. The tenant has been paying estimated NNN charges monthly. Compare the actual share to the estimates.
Step 5: Calculate the true-up. The difference is the true-up — either an additional charge or a credit.
Step 6: Issue the reconciliation statement. The statement is sent to the tenant with documentation.
Step 7: Collect or refund. The true-up amount is collected or credited.
Where NNN Reconciliation Fails
Timing Errors
The tax bill covers July to June. The lease year is January to December. The allocation is done incorrectly. The tenant is billed for the wrong period.
Base Year Errors
The lease says "taxes over base year 2023." The 2023 tax amount is $120,000. The current year is $135,000. The tenant pays their share of $15,000. The base year amount is entered as $110,000. The tenant is overbilled.
Cap Calculation Errors
The lease caps controllable CAM increases at 5% per year, cumulative. The calculation requires compounding the cap from the base year. The spreadsheet does a simple 5% calculation. The cap is wrong.
Exclusion Errors
The lease excludes "capital improvements, depreciation, and interest expense." A $25,000 roof replacement is included in CAM. The roof has a 20-year life. It is a capital improvement. The tenant is overbilled by their share of $25,000.
Gross-Up Errors
The building is 70% occupied. The lease requires a gross-up of variable expenses to 95% occupancy. The gross-up is not calculated. The existing tenants subsidize the vacant space.
The Komod.ai Approach
Komod.ai automates NNN reconciliation by applying the lease rules to the actual expenses:
Tax recovery. The tax bill is read. The recovery method is applied. The base year, cap, and pro-rata share are calculated automatically.
Insurance recovery. The premium is allocated to the correct period. Increases are calculated against the base year. Exclusions are removed.
CAM recovery. Expenses are classified against the lease inclusions and exclusions. The cap is enforced. The gross-up is calculated.
Documentation. Every figure is tied to the source document: the tax bill, the insurance invoice, the CAM expense, and the lease clause.
Conclusion
NNN reconciliation is the annual process that determines whether the landlord recovers the full cost of taxes, insurance, and CAM. The three nets have different rules, different timing, and different calculation methods. The errors are predictable and preventable.
The fix is not a better spreadsheet. It is a system that applies the lease rules to the actual expenses automatically.
Komod.ai is an AI-native operating layer for the commercial real estate back office. The platform reads leases, invoices, and bank activity; performs deterministic calculations; and stages completed work for human approval. Nothing posts without you.