Types of Commercial Real Estate Leases.
Commercial real estate leases are organized around two rent calculation methods: “net” and “gross.” In a gross lease, a tenant pays one lump sum for rent, which the landlord uses to pay his expenses. The net lease has a smaller base rent and the other expenses are paid for by the tenant. A combination of these two kinds of leases is the modified gross lease.
Gross Lease or Full Service Lease
Here, the rent is all-inclusive. All or most expenses associated with the property are paid for by the landlord. This includes taxes, insurance, and maintenance out of the rents received from tenants. Other things such as utilities and janitorial services are included within one easy, tenant-friendly rent payment. Some questions to ask while negotiating a gross lease include which janitorial services are provided, and how often. Often a tenant is charged back for excess utility consumption beyond building standards. This point should be clarified in advance especially if the tenant consumes much electricity. Property insurance and taxes are paid by the tenant only. This kind of lease is beneficial for the tenant because they can forecast expenses and do not have to worry about any unexpected charges levied on them. The landlord assumes all responsibility for the building, while tenants concentrate on growing their businesses.
Charges in a net lease include a lower base rent for the commercial space, plus some or all of “usual costs,” such as expenses associated with operations, maintenance, and use paid for by the landlord. All these charges include real estate taxes; property insurance; and common area maintenance items (CAMS), including janitorial services, property management fees, sewer, water, trash collection, landscaping, parking lots, fire sprinklers, and any commonly shared area or service.
Net leases can further be classified into the following categories.
Single Net Lease (N Lease)
In this lease, all the other building expenses are covered by the landlord. The tenant pays base rent plus a pro-rata share of the building’s property tax as also for the utilities and janitorial services.
Double Net Lease (NN Lease)
In this type of lease, the expenses for structural repairs and common area maintenance are taken care of the by the landlord. The tenant pays the base rent plus a pro-rata share of property taxes and property insurance as well as the janitorial and utility expenses.
Triple Net Lease (NNN Lease)
Most popular for commercial freestanding buildings and retail space, in a triple net lease, the tenant pays all or part of the three “nets” namely property taxes, insurance, and CAMS. This is apart from the base monthly rent. Tenants also have to pay the costs of their own occupancy, including janitorial services, utilities, and their own insurance and taxes.
The NNN lease or triple net lease is more landlord-friendly. It is important for tenants to review the NNN fees carefully as also negotiate caps on the amounts raised annually. This lease can also fluctuate every month or yearly depending on increases in operating expenses thus meddling with a company’s financial forecast.
Absolute Triple Net Lease
This type of lease is more rigid and binding and poses all kinds of risks to the tenant. This includes being responsible for construction expenses to rebuilding or continuing to pay the rent even after the building has been abandoned.
Modified Gross Lease
Gross leases are tenant friendly unlike net lease. The middle path is taken by a lease known as the modified gross lease where the rent is requested in one lump sum, and can include any or all of the “nets”–property taxes, insurance, and CAMS. This rent excludes utilities and janitorial services which are covered by the tenant. It is possible for the tenants and landlords to negotiate which “nets” are included in the base rental rate.
This kind of lease is more popular with tenants and if insurance, taxes or CAM charges increase, the lease rate would not change. Tenants can better control their expenses in such a lease since the janitorial service and electricity are not covered.
When doing a comparison between all the above-mentioned leases, make sure to consider all expenses and not just the base rental rates. The base rental rates for NNN are usually much lower, with additional expenses added for the real monthly rate. It is important for tenants to read their leases carefully, and clarify which are the expenses they are responsible for. Circumstances under which additional charges will occur should be identified and caps negotiated.