You’ve decided you want to lease space for your business, but what type of lease is best for you? Understanding how lease structures differ and which responsibilities you’re willing to take on are key to knowing which one is best for your business.
Triple Net Leases are most often associated with industrial projects, medical offices or retail centers. In a triple net lease, the tenant pays the base rent to the landlord, plus three key expenses: the cost of common area maintenance, property taxes, and building insurance.
In a typical NNN lease, the landlord passes those NNNs along to the tenant each month based on the tenant’s square footage compared to the building’s total square feet or Leased Pro Rate Share. For example, Tenant Leased SF / Total Building SF = Leased Pro Rate Share of the NNN expenses. The Landlord adds those NNNs to the Rate per SF.
So, what do those NNN’s really mean?
Common Area Maintenance (CAM) or Maintenance.
CAM are the expenses generated in upkeep, repairs, maintenance of elevators, parking lot, hallways, conference rooms, restrooms, etc of the building.
Taxes.
The property and any local government taxes associated with the building.
Insurance.
Just like homeowners, building owners need to have property insurance that covers rebuilding, repairing, or unexpected acts of mother nature such as floods, fire, or storm damage. It may also include liability insurance to cover claims for injuries sustained while on the property.
How are the NNNs calculated?
The landlord uses the number of annual costs (property taxes, insurance, maintenance) and divides it by the total number of rental square footage in the building, and then divides the sum by 12 to arrive at a monthly cost. This results in a monthly dollar amount per SF for NNN expenses.
Gross leases are typically associated with office and industrial projects. They pass some expenses through to the tenant, in addition to the base rent. Those expenses are typically metered utilities such as water and electricity. The “base year” cost for taxes, insurance, and maintenance is in the lease rate. However, any increases after the first “base year” may be passed along to the tenant on a pro rate basis in future years. Those operational expenses passed on are known as “pass-throughs”. The pass-throughs are over and above any set annual rent increases in the lease.
A full-service lease is commonly found in Class A office buildings. FS Lease is a type of gross lease where the rent is all-inclusive and paid as a single lump sum to the landlord. The landlord uses the rental income to cover every expense involved in the property’s operation. This includes the base rent, maintenance, property taxes, building insurance, and utilities. Increases in operational expenses may be passed through to the tenant(s) on a pro rate after the base year.
Triple net leases favor landlords, as they shift and place risk to the tenants. Full-service and gross leases have benefits for both parties and can be negotiated to strike an amenable balance. The most important rule of commercial leases is to read the lease carefully, work with a local real estate broker, and discuss with the landlord exactly what expenses you are responsible for.
At the end of the day, it’s a matter of what you’re comfortable with–making a set monthly payment or paying only for what you use. Ignorance may be bliss but, in this case, your “bliss” could be expensive.