Searching for a new office space in a diverse area like the Baltimore Washington corridor can seem like a daunting task. Even though you may already know what sort of space would be best for your office, one variable you may not have considered will undoubtedly rear its head during the negotiation process with the building’s landlord: the lease type. In that regard, it’s important to understand the different types of commercial leases that are available.
Gross Lease or Full Service Lease
In a gross lease, the rent is all-inclusive; the landlord pays all or most expenses associated with the property, including taxes, insurance, and maintenance. Utilities and janitorial services are included within one easy, tenant-friendly rent payment.
When negotiating a gross lease, the tenant should ask which janitorial services are provided and how often they are offered. Excess utility consumption beyond building standards is sometimes charged back to tenant; so if the tenant is a big consumer of electricity, this should be clarified in the lease. It’s important to note that the tenant pays their own property insurance and taxes.
A benefit of this type of lease is that it is very easy for the tenant, who can forecast expenses without worrying about an unexpected lobby maintenance charge, for example. The landlord assumes all responsibility for the building, while tenants concentrate on growing their businesses.
Net Lease
In a net lease, the landlord charges a lower base rent for the commercial space, plus some or all of “usual costs,” which are expenses associated with operations, maintenance, and use. These can include real estate taxes, property insurance, and common area maintenance items (CAMs), which include janitorial services, property management fees, sewer, water, trash collection, landscaping, parking lots, fire sprinklers, and any commonly shared area or services.
In this lease, the tenant pays base rent plus a pro-rata share of the building’s property tax (a portion of the total bill based on the proportion of building space leased by the tenant), and the landlord covers all other building expenses. The tenant also pays utilities and janitorial services.
Double Net Lease (NN Lease)
In this lease, the tenant is responsible for base rent plus a pro-rata share of property taxes and property insurance. The landlord covers expenses for structural repairs and common area maintenance. The tenant is also responsible for their own janitorial and utility expenses.
Triple Net Lease (NNN Lease)
This is the most popular type of net lease for commercial freestanding buildings and retail spaces. It is known as the net net net lease, or NNN lease, where the tenant pays all or part of the three “nets”–property taxes, insurance, and CAMs–in addition to a base monthly rent. Common area utilities and operating expenses are usually lumped in as well; for example, the cost for staffing a lobby attendant would be part of the NNN fees. Of course, tenants also pay the costs of their own occupancy, including janitorial services, utilities, and insurance and taxes.
Landlords typically estimate expenses and charge tenants a portion of these expenses based on their pro-rata share. A tenant who leases 1,000 square feet of a 10,000 square foot building would be expected to pay 10% of the building’s taxes, insurance, and CAMs, for example.
These leases tend to be more landlord-friendly, and tenants should carefully review NNN fees and negotiate caps on the amounts they can be raised annually. An NNN lease can also fluctuate from month to month and year to year as operating expenses increase or decrease, making the company’s expense forecasting tricky and sometimes frustrating.
There are tenant benefits in the NNN leases, however. Transparency is an excellent perk, since tenants can see business operating expenses in relation to what they are charged, and cost savings in operating expenses are passed on to the tenant rather to the landlord. In addition, the monthly rent in a NNN lease is potentially lower than in a gross lease, as tenants have a higher level of responsibility for the building.
Modified Gross Lease
If the gross lease is more tenant-friendly and the net lease tends to be more landlord-friendly, there exists a compromise lease for the convenience of both parties. The modified gross lease is similar to a gross lease in that the rent is requested in one lump sum, which can include any or all of the “nets”–property taxes, insurance, and CAMs. Utilities and janitorial services are typically excluded from the rent and covered by the tenant. Notably, tenants and landlords negotiate which “nets” are included in the base rental rate.
The modified gross lease is more popular with tenants because its flexibility facilitates 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 are passed on to the landlord. Since janitorial service and electricity are not covered, tenants can better control how much they spend compared to a gross lease.
Closing Thoughts
The most important rule of commercial leases is for tenants to read their leases carefully and clarify exactly what expenses they have responsibility for. Circumstances under which additional charges will occur should be identified and caps negotiated.
It is also important to have all details of the rent, including what you need to pay and what the landlord will cover, in writing, and to understand how operation costs have risen in the last few years in the building you are interested in.
For more information on how Murphy Commercial Real Estate can best help you, please reach out to us online or by calling 410-266-1113.
