There are several fundamental types of leases common to all real property. The types of lease are merely labels or tags and are merely for convenience sake. They are categorized as to who pays the expenses each year. Common expenses are taxes, property insurance, liability insurance, interior utilities, common area utilities, interior maintenance, exterior maintenance, common area maintenance, roof maintenance, HVAC maintenance, cleaning, reserves for replacement, management, etc.
Bear in mind that a lease is a contract and is binding. Thus, it may not fit into a neat category. The lease can be negotiated clause by clause until both parties agree and are willing to sign.
Three of the more common lease types are: gross lease, net lease and absolute net lease.
Bear in mind that the structure of the lease does not necessarily change the net income (NOI) to the landlord/lessee. For example, a Gross Lease where the seller pays all expenses except utilities may be set a rent of $20.00 oer SF per year. The major expenses are $4.00 per SF per year. The owner/landlord actually nets $16.00 per SF per year. If the tenant is willing to pay the $4.00 per SF, the seller will lease it for $16.00 per SF per year. There is no monetary difference.
A so-called triple-net lease or NNN lease is very common in office and retail properties. It basicly pertains to a net lease where the tenant pays for or reimburses the owner/landlord for property taxes, property insurance (and possibly liability insurance), and interior maintenance. Owners like this lease structure because they can advertise a lower rent quote since they are not paying the lion's share of the expenses (as they are in a gross lease). The owner/landlord nets the same (same NOI or Net Operating Income) and is nets the same by paying fewer expenses.
Much confusion arises in the real world because many brokers/agents treat a NNN lease as though it were an absolute net lease ie. a lease where the tenant pays EVERY conceivable expense, even a management expense. This leads to errors relative to the stated capitalization rate involved. Also, some brokers/agents utilize a "reserves for replacement" expense figure and some do not. Everyone must be on the same page. I see statements about NOI and cap rates that forget to account for 5% to 10% of the regular expenses in the property and this leads to errors in cap rate and NOI calculation.
Jun 24, 2012