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Commercial Lease Types
Lease Types Explained
We receive a lot of questions pertaining to lease structures from our clients and business partners.
What is a NNN lease?
What are operating expenses?
Why is that space A seems so much cheaper than space B nearby?
So, we thought we would provide some basics about lease types here and even provide some examples of how different structures compare to each other.
To start, not all leases are created equal. The landlord actually gets to determine the lease structure and template, but the type will be included with the listing details for potential tenants to see before touring.
What is the main difference between leases? Simply put, it comes down to which operating expenses are included with the base rent.
Nets are another term for operating expenses, and there are three of them:
- Common Area Maintenance (CAM)
- Property Taxes
- Landlord’s Insurance
Gross Leases
These leases include all or most of the operating expenses with the base rent price, with the most inclusive type being Full Service Gross (FSG). These are the most common with either very high-end properties to create an all-inclusive experience or with very small landlords who like to keep their leases simple.
Net Leases
These leases exclude all or most of the operating expenses with the base rent price, with the least inclusive type being Triple Net (NNN). Triple Net leases are very common. They are more predictable for landlords, because when a property is fully leased, the tenants assume all the risk for increased operating expenses. They are common in industrial, retail, flex and medical office buildings.
Hybrids
Some leases are in the middle of the spectrum. Modified Gross (MG) leases are commonly found in office buildings, which include all expenses for the first year of the lease – better known as the base year – and charge the tenant for the difference of the expense costs each year after.
Caution – because the lease type determines how much of the operating expenses are included with the base rent, the base rent price alone may not provide a direct comparison between properties.
Therefore, it is very important for business owners to factor in the operating expenses into the base rent price to accurately get the full picture and determine which rent price is actually the best deal.
We hope you found this information valuable! If you did, feel free to share the downloadable PDF of this handout. From our experience, commercial tenants and buyers who are more educated on the process tend to make better decisions for their businesses, which is why we like to share content like this.
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