Commercial Lease Types
The subject of commercial lease types can often be confusing. Let’s try to simplify it. There are three basic types of commercial leases. Each type centers around the base rent and the way the operating expenses are passed down to the tenant.
Full-Service Lease – A full- service lease will typically include the utilities, property taxes and janitorial services in the rental rate. This type of lease is commonly found in multi-tenant office properties. In a Full Service (FS) lease the landlord has the right to charge back the tenant for increases in operating expenses over the base year based on the tenant’s ‘pro rata’ share of the building. For example: if base year operating expenses are $100K and the following year they are $101K and the tenant’s pro-rata share of the building expenses are 10%, then that tenant would be charged $100 for that increase.
Industrial Gross: This type of lease is most common with multi-tenant office, industrial or warehouse space. The owner will pay for the common area and exterior expenses in addition to management, real estate taxes, insurance etc. The tenant will pay for expenses directly attributable to his space – such as electric, phone and internet. There is also a variation to Industrial gross called Modified Gross. Modified Gross is a lease that may have a common area maintenance charge (CAM) associated with it. This could be landscaping or water and trash charges in addition to base rent. This type of lease also has a base year.
Triple Net Lease – A triple net lease commonly referred to as “NNN” does not include operating expenses in its base rent. These leases are most common in retail or free-standing properties. In addition to base rent, tenants are billed monthly their pro-rata operating expenses which may include: utilities, maintenance, property taxes, insurance and sometimes management.
Whenever entering into a lease agreement with a landlord, make sure you are clear as to what type of lease it is and what expenses are covered so that there are no surprises down the line. It is a good idea to work with a licensed commercial real estate professional to help with deciphering and negotiating the terms associated with each kind of lease.