Commercial real estate leases are categorized according to two different rent calculation methods. These are “gross” and “net”. As a consequence of this categorization, there are three different types of commercial real estate leases. Gross lease basically implies that a tenant pays the landlord one lump sum amount for rent, and the landlord in turn pays for his expenses. On the other hand, net lease demands a smaller base amount but the tenant is responsible for paying other expenses that may be incurred during the lease tenure. The third type of commercial real estate lease is the modified gross lease which is a combination of the two different types of leases we have mentioned above. The terms of commercial real estate leases will differ from one building to another but this basic overview will help you find the best possible deal for your business.
Full Service Lease or Gross Lease
In a full service lease, the rent amount is an all-inclusive fee and the tenant does not incur any additional fees associated with the commercial property they are leasing. A full service lease is sometimes referred to as a gross lease. The landlord remains responsible for paying most or all expenses including insurance, taxes, and maintenance paid out of the rent received from the tenants. Janitory services and utility fees are included in one easy rent payment.
While negotiating a gross lease, a tenant should be keen to ask which additional janitorial services are included and how often these services will be provided. It is important to note that sometimes a tenant can be charged any extra utility consumption that is considered to be above the building’s standards. In such a case, if the tenant is a high consumer of any utility services such as electricity and water, this should be clarified in the lease agreement. The tenant is still responsible for his taxes and property insurance.
This type of lease is beneficiary to the tenant as it is hustle free to the tenant who can forecast his rent expenses without having to worry about additional charges that may be incurred. The tenant can concentrate on his business as the landlord remains responsible for the building.
Net Lease
In this type of lease, the tenant will be charged a lower base rent by the landlord for the commercial space being rented as well as any additional costs that are associated operations, use or operations that the landlord will pay. Such additional expenses can include property insurance, real estate taxes, common area maintenance taxes, acronymed known as CAMS. These include property management fees, janitorial services, water, sewer, trash collection, parking lots, landscaping, fire sprinklers as well as any common shared areas or services.
There are 4 types of Net leases, these are;
1. Single Net Lease
2. Double Net Lease
3. Triple Net Lease
4. Absolute Triple Net Lease
Single Net Lease: Also known as N lease, the tenant is responsible for paying the base rent and additional pro-rata share of property tax that the building accrues during the tenure of his lease. This amount is dictated by the total amount of building space that is leased by the tenant. The tenant pays additional janitorial and utility service fees.
Double Net Lease: The NN Lease gives the tenant responsibility of paying the base rent and a pro-rate share of property insurance and property taxes. The building’s landlord is in charge of covering all common area maintenance fees and any expenses associated with structural repairs. The tenant however remains responsible for utility expenses and janitorial fees.
Triple Net Lease: The NNN Lease is the most common type of commercial real estate property lease. The tenant pays for all the three net costs. These are insurance, CAMS and property taxes on top of the monthly base rent. Common area utility expenses are usually added onto the total amount payable by the tenant as well as any additional insurance, tax, utility and janitorial services.
The cost estimates are charged to the tenant based on their pro-rate or proportional share. The triple net lease is considered more landlord friendly and tenants are always advised to carefully review the terms of the NNN lease and try to negotiate caps on the amounts that can be raised on an annual basis. The NNN lease is also prone to fluctuating operating expenses that make it quite difficult to predict the business’ expenses.
However, there are some tenant benefits that are associated with this type of lease. One such benefit is transparency since tenants can easily account for what they are paying for. The tenant is therefore able to save on his expenses, a scenario which the landlord isn’t likely to consider undertaking. A triple net lease is also potentially lower that a gross lease as a higher level of responsibility is passed on to the tenant.
Absolute Triple Net Lease: This is a less common type of commercial real estate lease that is quite rigid and more binding that a normal NNN lease. The tenant is responsible for all risks and costs associated with the building during the tenure of his lease agreement. Costs associated with natural disasters, and rent costs for a condemned building are still the responsibility of the tenant.
Modified Gross Lease
The gross lease is considered tenant friendly while the net lease, on the other hand, is more landlord friendly. The modified gross lease is a compromise between these two types of leases. The modified gross lease (alternatively referred to as the modified net lease) is similar to the gross lease in that the tenant pays a lumpsum rent amount that can optionally include any or all of the CAMS, insurance and net property taxes. Janitorial services and utility fees will often be excluded from the rent agreement and the landlord and tenants can negotiate which “nets” will be included in the base monthly rent.
A modified gross lease is popular among tenants since it offers flexibility that will automatically translate into an easier lease agreement. As opposed to the NNN lease, the lease rate does not change for a modified gross lease even if CAM charges, taxes and insurance costs increase. However, if these costs decrease, the savings are passed on to the landlord. Electricity and janitorial services are not covered and as a result, tenants are better placed to control their recurrent expenses.
Summary of Commercial Real Estate Leases
When evaluating your options for commercial property business or office space, it is extremely important to compare your available lease options keeping a keen eye on all expenses and not just the available base rental rates. NNN base rental rates are usually lower but they incur additional expenses to gt the actual monthly payable rent rate.
Rental rates associated with comparable commercial properties tend to even out because of market forces irregardless of the type of lease. Office space in the same area will attract roughly the same amount irrespective of the type of lease agreement. One of the most important rule of commercial real estate leases for the tenant to carefully read the lease agreement and seek clarification on exactly what expenses the tenant will be responsible for. Clarification should also be sought on caps and any additional charges that can be incurred by the tenant.