You think you’ve found the perfect space for your business operations, but as you review the lease documents, you’re not certain that the terms are just as ideal. When legal terminology and technical language fill the page, how can you be sure you’re getting a good deal? Familiarizing yourself with lease types, terms and considerations puts you in position to negotiate favorably.
In the most simplified terms, there are three types of commercial real estate leases: a gross lease, net lease, and the modified gross lease. Within these three lease options, there are potential modifications to landlord and tenant responsibilities, as well as the flexibility for savvy tenants to negotiate.
A Gross Lease
Also known as a full service lease, a gross lease requires the tenant to pay a lump sum for rent. The landlord then covers his or her expenses using the funds from this single, all-inclusive payment. This includes taxes, insurance, building maintenance, utilities and janitorial services. (Though the business remains responsible for its own property insurance and taxes.)
Before signing a gross lease, tenants should clarify the specifics of janitorial services – which services are provided, and at what frequency? What’s more, utility overages may also be a concern. Excess utility consumption may be charged back to the tenant, so the limits and cost responsibilities should be clearly outlined.
The primary advantage to a gross lease is the ease of financial forecasting. When the landlord is solely responsible for the building and all costs are constant, tenants can focus on developing their business.
A Net Lease
In a net lease agreement, the tenant pays a base rent amount in addition to expenses related to building operations, maintenance and usage. These added costs may also include real estate taxes, property insurance and common area maintenance (CAM) items including janitorial services, parking lot maintenance, property management fees, water, trash collection, sewer, fire sprinklers, and any shared service.
If your lease covers a facility with multiple tenants, the landlord usually manages structural elements while CAM expenses are divided among the building occupants according to square footage. These costs are typically summarized in the lease paperwork as a percentage of the common areas, so it’s important to note how square footage is used as the basis of CAM charges. Also, carefully review the included expenses to be sure you know what you’re paying for.
Net Lease Variations
There are a number of net lease options in play in the commercial market, including single, double and triple net leases, as well as the absolute triple net lease.
A single net lease, sometimes called an N Lease, asks tenants to pay a base rent in addition to a pro-rata share of the building’s property tax, utilities and janitorial services. The landlord is responsible for all other building expenses.
Add property insurance into the tenant responsibilities listed in a single net lease, and you have a double net, or NN lease. Here, the tenant still covers janitorial and utility costs, but the landlord is responsible for expenses related to structural repairs and common area maintenance.
Most common among net leases is the triple net lease (NNN lease), which requires tenants to pay for a pro-rata share of property taxes, insurance and CAM expenses on top of the base monthly rent. Again, the tenants handle the costs of their own insurance, taxes, janitorial services and utilities, but with a triple net lease, common area utilities and operating expenses are lumped in as well.
While triple net leases are seen as landlord-friendly and can present financial forecasting challenges for tenant businesses, they do increase transparency. Tenants with a NNN lease are aware of the building’s operating costs in relationship to their rent, and any decrease in utility, service or insurance costs is passed directly on to the them. Plus, base rent amounts in a NNN lease tend to be lower to account for tenants’ greater responsibility for the facility.
One final net lease is rare, but still available in commercial markets: the absolute triple net lease. This option is more rigid and binding, holding tenants responsible for every imaginable real estate risk and giving them no option to cancel the lease.
A Modified Gross Lease
Striking a balance between gross and net leases, this option allows tenants and landords to negotiate what will be included in a lump sum rent payment. The rent may cover property taxes, insurance and CAM expenses, depending on what the parties agree to, but utilities and janitorial services are usually managed by the tenant.
This option is popular with tenants because of its flexibility; it allows them to reach an agreement with the landlord more easily. In addition, tenants can control their expenses more easily than with a standard gross lease because they handle janitorial services and utilities directly. And, if insurance, taxes or CAM costs go up, the base lease rate doesn’t change.
Regardless of the type of lease you encounter in the commercial market, always read your lease agreement carefully. Ensure that the premises you agree to occupy – including any parking areas and/or common areas – are clearly defined. Clarify what expenses will you be responsible for, how monthly costs may change over the course of the lease, and what fees may apply to the agreement. Negotiate caps on any annual increase in charges, outline tenant improvement allowances if they’re needed, and ensure that the building is ADA compliant.
And, if all of this still has you questioning whether you’re getting a good deal, reach out to a commercial real estate professional you trust. Intelica’s staff is here to help you master commercial real estate and make the best moves for your business. We can help you review lease documents, negotiate better terms, and claim the commercial space that fits your needs.