There are 3 basic Types of Commercial Lease Types – Full Service Gross, Modified Gross and Triple Net
It’s essential to understand the nuances of each commercial lease type before you start shopping for office space:
What is a Full Service Gross Lease?
In a full service gross lease, the rent is inclusive of base rent and all operating expenses, including utilities and janitorial services. The landlord uses the rental income to pay for all the building expenses and services, including property taxes, insurance, and maintenance.
Data and phone services, parking, and some other ancillary expenses if applicable, are not included in the full service gross rent, and are paid directly by the tenant.
A benefit of this commercial lease type is the convenience provided to the tenant of one monthly rent payment, and the ability to budget long term, versus a net rent, whereby the operating expenses may fluctuate more due to unforeseen maintenance for example. The tenant can also focus on its business instead of having to manage its share of the upkeep for the property. Full service gross lease structures are typically used in multi-tenant office buildings, where most tenants’ utility usages are comparable. Full service gross leases are the commercial lease type generally favored by tenants more than triple net leases.
It’s important however to understand that full service gross leases don’t completely protect you from unforeseen operating expense increases. Most full service gross leases contain language enabling landlords to pass back to their tenants any increases in the operating expenses over and above the first year of the lease. Operating expense pass-throughs and base years are common pitfalls for tenants and generally lead to an unpleasant surprise in year two of a lease if not addressed during lease negotiations.
What is a Modified Gross Lease?
The second commercial lease type is Modified Gross, which is simply a compromise between a gross and net lease. It’s basically a full service gross lease, with specific individual operating expenses paid directly by the tenant in addition to the gross rent. Modified gross leases typically break out electrical and/or janitorial services from the full service gross rent equivalent.
The modified gross lease is most suitable commercial lease type for tenants that have electrical power requirements outside the norm, that landlords would otherwise find prohibitive on a full service gross lease.
What is a Triple Net (NNN) Lease?
The third commercial lease type is Triple Net, where the tenant pays the base rent and in addition three primary operating expense categories, hence the “NNN” definition. These categories include A.) a CAM (Common Area Maintenance charge), to cover the landlord’s property management, waste, water, landscaping and general maintenance, B.) property taxes, and C.) building insurance.
In addition to the base rent and NNN charges, the tenant also pays their own utility charges for the subject premises, contracted direct with the service provider.
Landlords typically estimate expenses and charge tenants a portion of these expenses based on their proportionate, or pro-rata share.
Triple net leases are generally the most landlord-friendly commercial lease type, and tenants should always scrutinize NNN charges and negotiate limits on the amounts they can be increased annually. NNN charges can also fluctuate monthly as operating expenses increase or decrease, making it harder for a business to forecast and budget their occupancy costs.
Triple net leases are most suitable for industrial and retail multi-tenant properties where each individual tenant’s operating expenses can vary greatly, and can’t be managed under a gross lease structure. Operating expense cost savings are passed on to the tenant rather to the landlord.
Summary of Triple Net, Modified gross, and Full Service Commercial Lease Types
When comparing commercial lease types, its important to understand what operating expense categories are due in addition to the base rent, what those amounts are, and if they’re trending up or down. On face value, a triple net lease rate may appear artificially lower than a full service gross rent, but could end up costing a lot more in the operating expenses aren’t fully understood.
Overlook operating expenses and you may regret it. Conducting a thorough operating expense analysis with your tenant representation advisor will help you compare suitable properties on a comparable cost basis. It will also give you the insight and negotiating leverage you need to get landlord’s competing for your tenancy and ensure you negotiate bottom line economics on your new lease.