With private equity funds flush with cash they are ready to invest, and the expectation that rental rates in Silicon Valley will continue their rapid rise, commercial properties are trading hands at record prices.

Following a sale, many tenants are caught of guard when they receive a notice from their landlord notifying them that the operating expenes (sometimes referred to as triple nets, or NNN expenses) for their building will be increasing dramatically.

To put this in perspective I’ll provide an example. A tenant occupies 50,000 SF building where they pay $1.00, plus NNN expenses (NNN = maintenance, property insurance, and real estate taxes). Let’s assume the property was last sold 10 years ago and the property is currently assessed for $5M. This would mean the annual taxes are about $57,500, or about $.10 per SF, per month.

In today’s market, this building might be worth twice the currently assessed value, and possibly more. Let’s say this building is sold for $200 PSF, triggering a reassessment which doubles taxes to $.20 per SF, per month. In addition, insurance premiums see an increase of $.02 per SF, per month over the previous amount. Now what you have is a 10% increase in a tenant’s occupancy costs with no perceived additional value being provided to the tenant.

In today’s market, this is not an uncommon scenario. It is recommended that tenant’s retain a good broker to help shield them from some of these expense increases, or at the very least help them understand what impact a potential sale could mean to their bottom line. 

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