Unless you’ve spent some time around the commercial real estate industry, navigating and understanding the different types of leases you come across in your search for space can sometimes be a daunting task. To help you on your journey, we’ve put together a brief description below of the most common types of leases you’ll run across in commercial real estate and what they mean for you.
In general, there are 3 main types of leases you will run across: Triple Net, Full Service, and Modified Gross. We’ll also take a quick look at what a Ground Lease is.
Each of these types of leases revolve around a base rental rate and how the properties operating expenses are then passed down to each tenant in the building.
Full Service Lease:
Typically in this type of lease the asking rental rate for the property includes all operating expenses the property owes such as janitorial services, property maintenance, utilities, and property taxes. This type of lease is most common in multi-tenant office properties catering to smaller tenancy (1-15 person businesses).
While a full service lease has the vast majority of additional operating expenses already packaged into the monthly rent, the language within the lease typically states that the landlord has the right to pass down to the tenants any future increases in those expenses on a pro rata basis. So, for example during the summer months when a building will typically push out more air conditioning, the property’s A/C expense will likely be over what they estimate (based on previous year’s) and the tenants will receive a bill.
As a tenant, the benefit of this type of lease is that everything is included and your monthly payment will stay relatively consistent from month to month. However, be aware that if the monthly property expenses ever go down for your space, you’ll be locked into paying the higher agreed upon full service price.
Triple Net Lease (Typically listed as “NNN”):
This is by far the most common type of commercial real estate lease. But let’s start with the obvious, what does “NNN” stand for?
The “NNN” or “Triple Net” refers to: Net taxes, Net insurance and Net common area maintenance (which is often referred to as “CAM”; this includes things such as common area janitorial services, property management fees, common area utilities, trash collection, landscaping, parking lot maintenance, fire sprinklers, exterior lighting and other commonly shared area or service). All together these are referred to as the TICAM (taxes, insurance, common area maintenance).
In this type of lease the tenant pays all or part of the three nets, on top of their monthly base rental fee.
These additional fees are sometimes referred to as “Pass-Throughs” because the costs are being “passed through” the landlord down to the tenant instead.
Landlords typically divide the expenses among the tenants based on the percentage of space they occupy in the building. So if you lease 1,000 square feet of a 10,000 square foot building, you would typically be expected to pay 10% of the buildings taxes, insurance and CAMs.
The tenant benefits to a triple net lease are the transparency to see all business operating expenses in relation to what they are being charged. Tenants can also save money when operating costs go down and they aren’t stuck paying set fees as in the full service lease.
Modified Gross Lease:
This lease is essentially a mash-up of the two leases listed above and attempts to capture the best of both worlds and meet in the middle somewhere.
In this lease, much like the full service, rent is requested in one lump sum, which can include any or all of the “nets”. Utilities and janitorial services are typically excluded from the rent, and covered by the tenant. Tenants and landlords negotiate which “nets” are included in the base rental rate.
The modified gross lease is popular with tenants, because its flexibility translates into an easier agreement between tenant and landlord. Unlike the NNN lease, if insurance, taxes or CAM charges increase, the lease rate would not change. Of course, if those expenses decrease, the cost savings is passed on to the landlord. As janitorial service and electricity are not covered, tenants can better control how much they spend compared to a full-service lease.
Lastly, there is the ground lease. A ground lease is essentially an agreement between a landowner and a tenant in which they are permitted to develop a piece of property during the lease period, after which the land and all improvements are turned over to the property owner.
A ground lease is typically a long-term lease, as lease holders would of course be unwilling to build costly developments if the benefits could only be realized for a small number of years. For a landlord, a ground lease allows the assumption that their property will be improved upon and upon expiration of the lease hold more value and permit them to sell the property for a higher rate.
For the tenant, this type of lease keeps them from having to purchase potentially expensive land in order to begin a development.
And there you have it, the four most common types of leases you’ll run into on your search for space and what they mean for you. Of course making the decision on which lease is best for you and your business can sometimes be challenging as well, but hey, that’s what we’re here for!
CRUNKLETON & ASSOCIATES