When renting office, retail or warehouse space there are basically three essential kinds of commercial real estate leases that revolve around two different approaches to calculating the rent: ‘gross’ and ‘net’.
The net type of lease involves a smaller base rent, with the tenant also paying other expenses. On the other hand, a gross lease generally indicates that a tenant pays rent in one lump sum, whereby the landlord then pays their expenses. A modified gross lease is a plausible combination of the two. Although the terms will vary widely according to each building, this general outline will help businesses and individuals get the best deal available.
Full Service Lease or Gross Lease
In a full service lease the rent quoted includes all operating costs associated with leasing the space. The landlord pays most or all of the expenses related to the property, including maintenance, insurance, and taxes from the rent money received from each tenant. Both janitorial services and utilities are included for just one easy payment from the tenant.
When it comes to negotiating the terms of a gross lease, ideally the tenant should ask which specific janitorial services are included along with how often they’re offered as well. Overconsumption of utilities that surpass typical building standards is charged back to the renter sometimes. Therefore, if a certain tenant is a particularly excess consumer of electricity or gas, this needs to be pointed out in the terms of the lease. The tenant will pay their own taxes and property insurance.
A key advantage of this kind of lease is that it’s incredibly easy for the renter since it can predict expenses without the need to worry about an unforeseen lobby maintenance fee, for instance. The landlord is responsible for the building in general, while tenants focus on expanding their businesses.
What is a Net Lease?
In the case of a net lease, generally the landlord charges a lesser base rent regarding the commercial space as well as all or some of the typical costs, which usually include key expenses related to operations, use, and maintenance that the landlord covers. Some of these expenses may include, property insurance, real estate taxes, and CAMS (common area maintenance items), which involve:
• Property management fees
• Janitorial services
• Trash collection
• Fire sprinklers
• Parking lots
• General landscaping
• Any commonly shared service or area
There are a number of different kinds of net leases overall.
1. N Lease (Single Net Lease)
In this kind of lease, the occupant pays the base rent in addition to a pro-rata share of the property tax of the building, which refers to a part of the entire bill based on a portion of the total building space that’s leased by the occupant. Although the tenant pays for janitorial services and utilities, the landlord is responsible for all other expenses concerning the building itself.
2. NN Lease (Double Net Lease)
For a double net lease, the occupant is liable to pay base rent in addition to a pro-rata share regarding property insurance and property taxes while the landlord covers any expense for common area maintenance and structural repairs. Once again, the occupant is responsible for their own utilities and janitorial expenses.
3. NNN Lease (Triple Net Lease)
A triple net lease is the most common kind of net lease regarding retail & warehouse space, and freestanding commercial buildings. It's also becoming more common for landlords to use this type when leasing office space. It’s referred to as a ‘net’, ‘net’, ‘net’ lease (NNN lease), whereby the occupant pays part or all of the three said ‘nets’, including CAMS (common area maintenance items), insurance, and property taxes in addition to the base rent each month. Operating expenses and common area utilities are generally thrown in as well. For instance, the expense for hiring a lobby attendant would stem from the NNN fees. Naturally, occupants also pay for the costs of their own occupancy as well, including their own taxes and insurance, utilities, and janitorial services.
4. Absolute Triple Net Lease
Although this option is less common, it’s more binding and rigid than an NNN lease in general, whereby occupants carry virtually every real estate risk imaginable, for instance, being liable for the expense of rebuilding following a disaster or for paying rent even if the building is condemned. Appropriately referred to as the ‘hell or high water lease’, occupants are ultimately responsible for the building regardless of what happens.
5. Modified Gross Lease
While the net lease is more landlord-friendly, and the gross lease is somewhat more tenant-friendly in nature, there’s a ‘compromise’ lease that exists for both parties. Sometimes referred to as a modified net lease, the modified gross lease is much like a gross lease in that the primary rent is provided in one lump sum and can include all or any of the ‘nets’, such as CAMS, insurance, or property taxes. Janitorial services and utilities are generally covered by the occupant. Both landlords and tenants negotiate which specific ‘nets’ will be included in the base rate of the rent.
With most tenants, the modified gross lease appears to be more popular overall due to its flexibility that translates into much easier terms of agreement between the landlord and the tenant. Different from the NNN lease, the rate of the lease will not change if taxes, insurance, or CAM fees increase.
Overview of NNN Lease, Full Service, or Modified Gross Commercial Leases
When weighing all the pros and cons of leasing office, retail, or warehouse space for your business, it’s crucial to compare all the different options available to you with a keen eye on all expenses, rather than just the primary rental rates. Overall, NNN primary rental rates tend to be substantially lower, with added fees for the actual monthly rate.
Regardless of the specific kind of lease, market forces will generally even out the rental rates regarding comparable properties. Occupants should expect to shell out the same amount with a full service, modified gross, or NNN lease for comparable quality office spaces around the same vicinity.
When it comes to commercial leases, the most important rule to remember is to thoroughly read the entire lease from beginning to end very carefully, and to clarify which expenses and fees you’re liable for. Certain situations for which additional charges may arise should be readily acknowledged and negotiated.