Commercial leases typically break down into 3 major categories, with a few variations depending on property type and individual properties. They each revolve around the base rental rate and how the properties operating expenses are passed down to each tenant in the building.
Full Service – typically means the asking rental rate of the property includes all operating expenses the property owes such as janitorial services, property maintenance, utilities, and property taxes. This is the simplest and most undisguised form of a commercial lease and 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 baked 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.
Triple Net Lease – (commonly listed as “NNN” on available space listings) - refers to properties whose asking rental rate is not inclusive of the additional operating expenses tenants can expect to incur renting space. Net leases are very common in retail properties or free standing properties, but are also beginning to become prevalent in traditional multi-tenant office properties as well.
The “net” operating expenses categories are utilities, maintenance, property taxes, insurance and sometimes management. Landlords typically bill their tenants each month for these extra expenses in addition to the rent.
These additional operating expenses can vary from property to property, but prospective tenants can typically add $10-$15 per square foot in annual rental rates to get an idea of total cost picture.
Modified Gross - sometimes referred to as “Industrial Gross”, this type of lease is most common with industrial or warehouse space. In most cases, tenants of industrial properties will have a full service lease that’s been modified so that some of the expense categories (usually electrical) will be charged in addition to monthly rent. All other property expenses are already included in the regular monthly rent.
Percentage Lease – the tenant is responsible for paying base rent on the property, as well as a monthly % of revenue earned from the business occupying the rented space. They are most often used in retail spaces and specifically malls.
Apr 5, 2017