Commercial Real Estate Lease Types
A Run Down of Common Lease Types Used in Alaska
One of the largest searches on the web pertaining to real estate today is searching for Commercial Lease definitions or the definitions of common terminology used by Brokers in advertising space. Investors, Owners, and Tenants today are self-sufficient, tech savvy, and like to find information in a matter of moments on between their smart phone and tablet. Sometimes gaining an understanding of lease types isn’t that simple, often you have to go a step further, get to know the market center your in, and understand common leasing practice in the area.
Regardless of your role, Investor, Owner, or Tenant; it is advantageous to understand all types of Leases. Gaining a full understanding of Lease types and terminology affords you negotiating power, and the ability to secure the best possible lease terms. Throughout most of Alaska we generally see three primary types of Commercial Real Estate Leases regardless of commercial property type; the “Gross Lease”, also known as the “Full-Service Lease,” the “Net Lease”, and the “Modified Gross Lease”. All of these are calculated off of “Net” and “Gross” rent calculation methods.
The Gross lease is the one most commonly assumed types amongst new Landlords and Tenants, under a Gross lease the number negotiated and focused on is the actual dollar figure of a rent payment. The Gross lease calculates the rent payment as one lump sum for rent, within this arrangement the Landlord pays his expenses from the tenant’s payment. In contrast, under the Net lease often there is a smaller base rent, but the tenant covers other expenses. While the Modified lease is a synergistic combination of the Gross and Net lease. From building to building, market to market, and Landlord to Tenant; terms vary widely. This basic overview will help you to gain a better understanding of lease types available.
Gross Lease or Full-Service Lease
Under the Gross or Full Service lease, the tenant is responsible for a single rent payment to the Landlord, which includes their monthly expenses. The landlord pays all or most of the expenses associated with the property including insurance, maintenance, and taxes from the Tenant’s rent payment. Often, but not always utilities and janitorial services are inclusive with the Tenant’s rent payment.
As a Tenant negotiating a Gross lease, it is important to obtain a list of included services and utility consumption building standards. Excess utility consumption beyond negotiated standards within the lease is sometimes charged back to the tenant. Under this lease type, the tenant is responsible for their own taxes and holding an insurance policy issued directly to their business which meets the requirements of their lease.
The Gross lease is Tenant friendly and by far the easiest type for forecasting expenses because there are no increasing service charges or utility charges. The Landlord is responsible for all the fluctuating costs associated with the building, while Tenants are able to focus on increasing profits for their businesses.
A Net lease works reverse of the Gross lease. Typically a lower base rent is given for the commercial space, with some or all “usual costs” such as operations and maintenance expenses. In addition to the base rent and usual costs, the Tenant pays their share of “CAM” charges which include property management fees, janitorial service fees, sewer, water, refuse collection, landscaping, parking lots, fire sprinklers, and any commonly shared areas or services.
There are several types of net leases:
Single Net Lease (N Lease)
Under the Single Net Lease or N Lease, the tenant pays their base rent and a pro-rated share of the building’s tax (their portion of the total bill based off of the building space leased by the Tenant). The Tenant is also responsible for the cost of their utilities and janitorial costs. The landlord covers all other building expenses.
Double Net Lease (NN Lease)
Similar to the Single Net Lease the under a Double Net Lease the Tenant pays the base rent, utilities, and janitorial costs. The difference is under an NN Lease the Tenant must pay the pro-rated share of insurance AND property taxes based on space leased.
Triple Net Lease (NNN Lease)
The Triple Net Lease or NNN Lease is the most common lease type used retail space and for stand-alone commercial buildings. Under the NNN Lease, the tenant pays all or part of the three “nets”, including insurance, property taxes, and CAMS in addition to their base rent. Often utility costs and operating expenses for common areas are also included based on the tenant’s occupancy.
Triple Net Leases are often for the Landlord- however, not always. Tenants should review all fees carefully and negotiate caps on the amounts they can be raised annually. An NNN lease fluctuates from month to month based off of usage. Due to inconsistency, this can pose as a challenge to businesses trying to forecast expenses.
There are some benefits to Tenants who lease using the NNN format. Transparency is the perk; Tenants can see their operating costs in comparison to what they are charged. Cost savings in CAMS or operating expenses are given to the Tenant rather than the Landlord. Additionally, the monthly rent payment on a NNN Lease is often much lower than a Gross Lease, as tenants are given a higher responsibility for the building.
Absolute Triple Net Lease
The Absolute Triple Net Lease is not common in today’s market as it is more rigid and binding than the NNN lease. Under the Absolute Net Lease Tenants carry every imaginable real estate risk, for example, being responsible for construction expenses to rebuild after a catastrophe, or for continuing to pay rent even after the building has been condemned. Aptly called the “hell-or-high-water lease,” tenants have ultimate responsibility for the building no matter what.
Modified Gross Lease
The Modified Gross lease, also referred to as the Modified Net lease, is a happy medium between the Landlord friendly Net Lease and the Tenant friendly Gross lease. It is a compromise between both parties, creating a meeting of the minds for all parties. The Modified Gross lease shares similarities with the Gross lease such as rent payments are paid and received in one lump sum; this can include any or all “Nets”- CAMS, property taxes, and insurance. Under the Modified Gross lease utilities and janitorial services are at the tenant’s expense and excluded from their rent payment. Typically properties have standard “Nets” they include covered in the base rent, but these like all other aspects of the lease are open to negotiation.
Tenants and Landlords both find the Modified Gross lease is an easier agreement because of the flexibility it offers. Unlike the NNN lease if CAM charges, insurance, or taxes increased the lease rate would not change for Tenants. In contrast, if these decreased, cost savings would go to the Landlord.
Every Lease is Unique to it’s Property, Landlord, Tenant, and Market
As an Investor, Owner, or Tenant its important to evaluate every lease and compare the different options keeping costs in mind, and not just the base rental rates. Low base rates of the NNN lease tend to be made up for in the additional costs every month. Typically the market will level the playing field long before your lease shopping or looking for a Tenant, making all com parables similarly priced. Ultimately it is what the market will bare that determines rental rates.
The number one rule of commercial leases is for Tenants and Landlords, always read their leases carefully, and clarify exactly what costs they have responsibility for.
Hiring an experienced Commercial Real Estate Brokerage to review your Investment prior to purchase saves a lot of headache in the long run! As an owner or a tenant, having a Commercial Broker oversee your lease ensures nothing is overlooked. For more information on lease types or representation, please contact Chad Graham at, Graham Commercial Real Estate at 907.331.4645.
Copywrite 2015 Graham Commercial Real Estate Consultants, Inc.