Searching for space to operate your business can be confusing if you don’t know commercial real estate lease agreement terms and lingo.
COMMERCIAL REAL ESTATE LEASE AGREEMENTS
Getting a straight apples-to-apples cost comparison for commercial properties can be a very daunting task. As with most potential renters, you want to make sure you’re getting everything you desire while keeping in line with your budget. Having a better understanding of commercial real estate lease agreements as a whole can help you do just that.
Below you’ll find a list of the most common commercial real estate lease agreement lingo which will help you nail down the perfect building for your business:
GROSS or FULL SERVICE (FS) LEASE AGREEMENT
Think of a full service lease as all-inclusive package most commonly used in multi-tenant office buildings: The tenant pays one price on a pro-rata basis and most, if not all, of the expenses affiliated with the property itself aka “nets” including taxes, insurance, utilities, and maintenance, are paid for by the landlord. The landlord is solely responsible for all maintenance of the building, allowing tenants to concentrate on growing their businesses. Full service leases tend to be more tenant friendly.
NET LEASE AGREEMENT
Net lease agreements are one of the most common commercial lease agreement types, are more landlord friendly, and allow a smaller base rent plus a pro-rata share of the buildings “nets” i.e. utilities, maintenance fees, taxes, landscaping, etc. Net leases can be broken down into several categories are are most often found in retail and free standing properties:
Single Net Lease (N Lease): The tenant pays a base rent based on office space as well as a share of the building’s property tax while the landlord is responsible for all other building expenses. The tenant is also responsible for their own utilities and janitorial needs as well as insurance and taxes.
Double Net Lease (NN Lease): The tenant pays a base rent based on office space as well as a share of the building’s property tax & property insurance while the landlord is responsible for all other building expenses. As with the single net lease, the tenant is responsible for their own utilities and janitorial needs as well as insurance and taxes.
Triple Net Lease (NNN Lease): The most common type of agreement, the triple net (NNN) lease, requires tenants to pay a base rent based on office space as well as a portion of property taxes, insurance, and common area maintenance (CAM) fees. Triple Net Leases can be tricky and can fluctuate from month to month and year to year as overhead expenses rise making it increasingly hard for businesses to budget for their charges.
MODIFIED GROSS LEASE AGREEMENT
While a full service lease agreement favors the tenant and net lease agreement favors the landlord, modified gross lease agreements provide a compromise for both parties and are a hybrid between triple net and full service leases. A modified gross lease is most common with warehouse & industrial space and the rent is still provided in one lump sum. Included in that sum are any “nets” i.e. taxes, insurance, CAMS, etc. negotiated between the landlord and the tenant and are included in the base rental rate. Per usual, utilities, and janitorial services are additional expenses covered by the tenant, but if taxes, insurance or CAM rates increase, the tenant is only responsible for the base rental rate previously agreed upon. These types of leases are often the most confusing and require the most scrutiny to assess the value that is being derived.
Percentage Lease Agreements
The percentage lease requires tenants to pay a base rental rate as well as a certain percentage of their gross revenue collected while occupying the space. Percentage leases are most commonly used in retail shopping malls.
Have further questions regarding commercial real estate lease agreement terms and lingo? Feel free to contact me with any questions you may have!