Most business owners and entrepreneurs want to find the best location for their business. This could be an office, a warehouse, or a storefront depending on the type of business. The language and terminology related to real estate leases can be confusing and overwhelming. Below is a list of the various commercial lease types and what they mean to both the landlord and tenant.
Triple Net Lease or NNN Lease
A triple net lease can also be referenced as a net, net, net (NNN) lease. This lease type is often found in leases for large office buildings, large industrial buildings, and in retail or storefront buildings.
In this lease structure the tenant pays a base rental rate. The base rent will be clearly delineated over the life of the lease. Often times the base rent will escalate at an agreed upon percentage rate or based upon inflation and linked to the Consumer Price Index (CPI).
As well as the base rental rate the tenant will pay the net expenses. The net expenses are taxes, insurance, and maintenance costs. These fees can be included in common area maintenance fees or CAM charges. These expenses are in addition to the base rental rate.
A landlord generally likes this lease structure because it places some of the future price risk on the tenant. Taxes, insurance, and utility costs are, generally, going to increase over time. The expenses that could potentially damage a landlord’s income, are passed on to the tenant and help the landlord to plan future income.
The tenant is taking on the additional risk of taxes, insurance, and maintenance with a triple net lease. In exchange for this risk, they will often be given a lower base rental rate. A commercial tenant may not be able to avoid this type of commercial lease. When comparing a triple net lease to a gross lease all triple net expenses need to be included.
When all of the expenses associated with a property are included in the base rental rate of a commercial lease, you most likely have a Full Service Gross Lease. These expenses include real estate property taxes, property insurance, utilities, maintenance, and janitorial. Some office leases, retail leases and industrial leases are gross leases.
A commercial lease structured in this manner places the risk of expense growth upon the landlord. The landlord is responsible for any increase in the price of insurance, property taxes, or utilities. A landlord may choose this lease because the rental market demands it, the tenant leases the entire building, or the property only has one utility meter and the landlord cannot accurately divide utility costs.
A commercial gross lease relieves the tenant of the risk of price inflation. As well, it simplifies the lease rate as the tenant will only be quoted a base rental rate that includes all expenses for the property.
Most commercial leases are a combination of a net lease and a gross lease. In other words, the tenant pays some of the expenses and the landlord pays some of the expenses.
Industrial Gross Lease
In an industrial gross lease the tenant pays a base rental rate and their share of the common area expenses. The landlord will pay the property taxes and insurance costs in the first year or base year. In subsequent years, any property taxes or insurance costs above the base year amount are the responsibility of the tenant.
Modified Gross Lease
A modified gross lease is similar to a full service gross lease except that one or more item may be the responsibility of the tenant. In a modified gross lease a tenant may be responsible for their own utilities, janitorial, or maintenance costs depending on the scenario.
Procuring a commercial lease for your business can be challenging. If you would like assistance with this process, please call today at (925) 385-8798 to see if we can assist you.