Commericial Lease Break Down

There are three basic types of commercial real estate leases, organized around two rent calculation methods: “net” and “gross”. In a Gross Lease, the tenant typically pays one lump sum from which the landlord will then pay their building’s operating & maintenance expenses. A Net Lease has a base rent plus additional expenses that are the responsibility of the tenant. Lease terms will vary significantly from building to building and we hope that this overview will help you shop for the best lease to fit your needs.

Gross Lease: In this type of lease, the rent is all-inclusive. The landlord will pay for most expenses that are associated with the property from the rent that he/she receives from the tenants. This typically will include taxes, insurance, maintenance, janitorial services and sometimes utilities. It is important for the potential tenant to inquire what type of janitorial services will be provided and how often, as well as what utilities are provided. Also, if any utilities will be billed back to the tenant in the case of excessive consumption. If so, a cap should be clarified on the lease. In a gross lease the tenant will still be responsible for their own insurance and taxes.

This is a great lease for the tenant as it allows them to budget each month without having any unforeseen costs arise. The landlord focuses on the building so that their tenants can focus on managing and growing their businesses.

Net Lease: In a net lease, the landlord charges a base rent for the space plus additional cost for building maintenance and operations which may include: real estate taxes, property insurance, common area maintenance, utilities, landscaping, parking, etc…

Triple Net Lease: The most popular type of Net Lease is a Triple Net (NNN) where the tenant pays the base rent plus all or part of the three “nets” associated with the building – property taxes, insurance and common area operating expenses. The tenant is also responsible for paying for their own utilities, insurance and taxes.

Triple Net Leases tend to be more landlord friendly which is why it is important for the tenant to carefully review all fees and work to negotiate caps on the amounts that they can be billed annually.

The benefits to a Triple Net Lease are that the building expenses are made transparent to the tenants, and the base rent tends to be lower than in a gross lease as the tenant is responsible for more of the building operating costs.

Absolute Triple Net Lease is a more binding and strict NNN lease. Tenants carry all of the risk for the building such as costs of rebuilding after a natural disaster or continuing to pay rent even if a building has been condemned. The tenants have ultimate responsibility for the building regardless of circumstances.

When evaluating and negotiating options for a commercial lease be sure to compare the different lease options with all expenses in mind. While a NNN Lease may seem more appealing because of the lower base rent, the additional building operating costs will determine the true monthly rental rate. Market forces should however tend to even out leases across similar spaces, regardless of their type. Be sure to read over your lease carefully and clarify what expenses you will be responsible for so that you can have a more accurate idea of how much to budget for each month. Any potential additional charges should be identified and caps negotiated, whenever possible.

Contact us for assistance with lease negotiation and execution.

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inquiry@compassfirst.com