NNN Leases on the Big Island: What Commercial Property Owners Need to Know

Properly structured leases are essential for stabilizing commercial property income. Triple net (NNN) is a lease structure we favor because it protects owners from shifting operating costs while giving tenants transparency into what they're paying for.

What Is a Triple Net Lease?

A triple net lease, commonly written as NNN, is a lease structure in which the tenant pays base rent plus their proportional share of three operating costs: property taxes, building insurance, and maintenance/repairs. Rather than the landlord building those costs into a single rent figure and absorbing fluctuations, they're broken out and passed directly to tenants. The result is a cleaner, more transparent picture of what everyone is paying for.

For owners who hold commercial property as a long-term investment, that stability matters. It makes the property easier to underwrite, refinance, and value. But for that structure to work as intended, the lease must be written carefully and managed consistently.

What Gets Passed Through and What Doesn't

Tenant operating costs are covered under CAM, while landlord expenses are capital expenses. The distinction comes down to repair (tenant's cost) vs. replacement (landlord's cost). In addition to property taxes and insurance, routine maintenance and repairs generally qualify as CAM and can be passed through to tenants. We've covered this in detail in CAM vs Capital Expenses in Commercial Property Management.

There's also a critical Hawaii-specific cost to account for: General Excise Tax (GET), a tax on the landlord's gross receipts. This means it applies not just to base rent but also to property taxes, insurance, and CAM passed through to tenants. A properly structured Hawaii NNN lease must explicitly state that the tenant is responsible for GET on top of all gross amounts.

Maintenance Responsibilities

In a single-tenant NNN lease, it's relatively common for the tenant to take on full maintenance responsibility for the building, including HVAC, plumbing, and sometimes even the roof. In a multi-tenant property, it's more typical for the landlord to maintain the building systems and common areas, with costs passed through as CAM. The lease should make those responsibilities unmistakable.

The questions that generate the most friction in multi-tenant NNN properties:

HVAC. Who is responsible for the unit serving a specific tenant's space? Is it the tenant's responsibility, or does it roll into CAM? If the unit needs to be replaced entirely, who pays? These questions should be answered in the lease before anyone signs, with the lease clearly defining who handles repair, maintenance, and replacement.

Roof. Patching and coating an aging roof are generally items covered under CAM. Replacing it entirely is a capital expense, the owner's responsibility. But what happens when a roof is deteriorating, and repairs become a recurring cost? The lease should clearly distinguish between repairs and replacement to protect both parties.

Interior vs. exterior. In most multi-tenant commercial leases, tenants are responsible for the interior of their space, and the owner handles the building exterior and common areas. But "interior" and "exterior" need to be defined. The lease should specify where the tenant's responsibility ends, and the building's begins.

Leases with vague or missing language tend to generate disputes because what seems obvious to one party isn't always obvious to the other. That is why these details need to be addressed before issues arise.

CAM Estimates and Year-End Reconciliation

CAM is the tenants' money, collected to cover shared operating costs that should be clearly defined in the lease, and it must be reconciled annually. If actual costs come in under the estimate, the difference goes back to the tenants. If costs run over, tenants owe the difference. A good property manager monitors these costs throughout the year and aims to come as close as possible to breaking even. But there are always variables outside anyone's control, our insurance market on the Big Island being a prime example.

Estimates that are consistently too low frustrate tenants when the reconciliation comes in. Estimates that are too high create cash flow complications and erode trust. A good estimate is based on actual historical CAM costs and known changes coming in the next year, not a round number.

Reconciliation has to happen on a consistent schedule. Owners who let this slide end up either eating the difference or going back to tenants months later with an unexpected bill. Neither outcome is good. Annual reconciliation, done promptly and clearly communicated, is standard practice.

Documentation is the foundation. Invoices, vendor contracts, maintenance logs, and clear CAM definitions are what back up CAM charges when a tenant asks questions. And tenants do ask. Having organized records makes reconciliation straightforward. Not having them makes it contentious.

NNN Is Not Passive

This is the most important thing to understand about NNN leases: they reduce cash flow variability for owners, but they don't reduce the work of managing the property well.

What NNN leases still require from an owner or their management team:

• Careful lease drafting and review before execution

• Accurate CAM budgeting at the start of each year

• Ongoing vendor management and maintenance oversight

• Year-end reconciliation with clear tenant communication

• Lease administration — tracking renewal options, rent escalations, and compliance

• Owner reporting, so you know what's happening with your asset

  
  

As we cover in What Building Owners Should Know About Commercial Property Management, this kind of consistent operational attention is what keeps a property performing over time.

Getting It Right From the Start

A well-structured NNN lease is a genuinely strong tool for commercial property owners. The predictability it offers is real, and when it's working correctly, it protects your net income from the cost increases that affect every property over time.

If you're currently self-managing your property, reviewing an existing lease, or considering NNN for a building you're about to lease up, we're happy to walk through the specifics with you.

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