When renting office space you need to make sure you understand how the monthly rent is calculated and what all is included. You see there are 3 basic types of commercial real estate leases and they typically use one of two rent calculation methods: “Net” or “Gross”. This can get confusing when you are looking at more than one property because they all quote their commercial office rental rates differently. Below Austin Tenant Advisors has described the difference between each
Two Commercial Rent Calculation Methods
With Gross leases tenants pay one lump sum (e.g. $30 sf), from which the landlord pays his operating expenses. With a net lease the base rent and operating expenses are split so the tenant pays a smaller base and its pro rata share of operating expenses (e.g. base rate of $20 sf + $10 nnn). NNN is also known as operating expenses. There is a also a modified gross lease in which it’s a combination of the two.
Gross Leases (aka Full Service Lease)
In a Gross lease the commercial office space rental rate includes everything (taxes, insurance, maintenance, utilities, janitorial, etc). There are some instances where the tenant still has to pay it’s own electric so make sure to ask. The landlord pays all operating expenses out of the gross rentals received from tenants.
If janitorial is included ask what services are provided and how many days per week they come. If you are a big consumer of electricity or after hours air conditioning the landlord will probably charge you back for excess usage. Find out what the charge is. Tenant’s are always required to pay for their own general liability and property insurance.
The benefit to having a Gross lease is that you won’t have any unexpected increases. Your monthly commercial office rent will be the same throughout the lease term. The landlord will assume all responsibility for expenses and you just pay the rate that was negotiated.
Here the landlord will separate the base rate from the building operating expenses. For example you may be charged $15 sf base rate plus $10 sf for the operating expenses (aka NNN) which will include taxes, insurance, and maintenance fees (trash, landscaping, parking lots, etc…). When leasing office space the NNN will also include janitorial & electric charges. Make sure you ask!
Net leases come in several forms:
- Single Net Lease – Tenant pays base rent AND it’s pro-rata share of the property’s taxes. Pro-rata share means the portion of square footage that the tenant leases compared to the total square footage of the building (e.g. tenant leases 1,000 sf of a 10,000 sf building. Their pro-rata share is 10%). The landlord covers all other expenses…….except tenant pays for electrical & janitorial (if needed).
- Double Net Lease – Tenant pays base rent and it’s pro-rata share of taxes and insurance. Landlord pays for repairs and common area maintenance (CAM). Tenant pays for electrical & janitorial
- Triple Net Lease (NNN) – This is the most common type of net lease that commercial property owners use. Tenant is responsible for paying base rent AND it’s pro-rata share of property taxes, maintenance, and insurance. Tenant’s also pay for their space electrical and janitorial. With NNN leases landlords estimate the total operating expenses for the building and then divide that by the total square footage. That number becomes the Tenant’s NNN which is multiplied by the square footage that each tenant occupies. Landlord’s like NNN leases because they get to pass 100% of all the costs to the tenants. Any increases each year are also passed along which is why you want to negotiate some sort of cap on the controllable items. Tenant’s don’t like them as much because their total monthly rent can fluctuate from month to month and year to year. If NNN’s increase the tenants pay the extra. If they go down the get a reduction.
- Absolute Triple Net Lease – This is not very common but basically it’s more rigid than NNN lease. Tenant’s are responsible for all costs including construction after a disaster, paying rent after property has been condemned. Not matter what tenant is responsible. Often called “hell or high water lease”.
Modified Gross Lease
Gross leases are typically more tenant friendly. NNN leases are typically more landlord friendly. Modified gross lease is kind of a compromise in the middle. It’s similar to gross lease in that monthly base rent includes everything except utilities & janitorial. Landlord and Tenant negotiate to determine which Nets are included in the base rent. If taxes, insurance, maintenance fees increase the base rate would not change. If they go down only the landlord gets the savings.
Summary of Commercial Office Rental Rates
When comparing commercial office properties for rent it’s important to know the different lease options and who is responsible for paying what. Don’t just think about the base rents. Find out what type of lease the landlord uses and who pays all the other costs, including electric & janitorial.
Regardless of what type of lease is used commercial real estate market lease rates tend to be on par with each other. Meaning one landlord may charge $20 + $12 NNN while the other charges $32 sf gross.
If you have any questions about the difference between commercial office space rental rates don’t hesitate to give us a call at 512-861-0525