Exploring a new lease or looking at signing a lease as a business owner can be pretty stressful and a long term commitment for sure. When you start looking at space and lease options it seems like every building has its own language and every owner definitely has their own list of demands and concerns for a happy relationship. Even though essentially every lease type has the tenant paying all expenses related to their space there are several different lease types that allow for pass throughs and landlord exposure to be as limited as possible. Below are a few regularly used lease types you will see during the process.
- Full Service Lease – This is typically in an office location or a multi tenant space that the landlord is assuming the responsibility of much of the maintenance and services. While you are usually paying a higher per square foot rate, you are also being provided a higher level of service from the landlord. Common area cleaning, electric and gas, insurance and taxes are usually all included in this Full Service Lease rate.
- Modified Gross – This to me is the most vague lease that comes across in rental space and its completely loaded to benefit the landlord. Modified Gross means that they are still passing through some of the expenses related to the space but are charging you one monthly rate on top of that. So you pay a Gross amount in rent to cover everything except say taxes for instance. This rate gets the tenant a set price to cover all expenses but protects the landlord from any increases in taxes or other expenses that may relate to the space like CAM charges after a harsh winter.
- NNN or Triple Net – Triple Net is typically used in a single tenant space or a retail environment but can be used in any lease that the landlord wants the tenant to be responsible for every cent that comes through as an expense to the space. The tenant pays a Base Rent rate usually from a per square foot number and then all taxes, insurance, CAM fees and any other related expense that may arise or increase. If the value of the building goes up and the taxes increase, the tenant pays. If the parking lot needed lots of extra ice melt last winter the landlord will be increasing the CAM fee to make up for that and if the landlords insurance rate increases that is also being passed along to the tenant. All expenses related to the space are passed through to the tenant in a NNN lease. This is the best scenario for a landlord and a smart way to do business.
- Gross Lease – I do not see a lot of this accept where the landlord can control 3rd party expenses like utilities and maintenance on a building. Older industrial space that is not sub metered for power and utilities can be a gross lease because its cheaper for the landlord to assume that cost then to figure out a way to charge each tenant per month. The landlord typically figures out the annual expenses on a building and builds that into a gross lease amount for the tenant. If they use more power then expected or a roof needs to be replaced, the landlord eats it and covers the cost. As a tenant it is a great lease to avoid any unplanned large expenses that can come up in a NNN lease or a Modified Gross Lease.
- Landlord Lease – There are many landlords that have owned buildings for years and have created their own lease agreement just for that space. After reading through them they are not identifiable with any of the above lease types but more of a one off lease just to satisfy the landlords concerns and needs. They are usually fine and can be a lot more practical for a space but I always encourage tenants to read the fine print and have their broker or attorney review it for any questionable terms. As a landlord its also wise to consult a professional to avoid any exposure or missed points that could arise from not covering all aspects of a long term lease agreement.
As you can see above, move leases do the same thing and really only have a difference when additional expenses arise. Going into a lease agreement with a full understanding is key to avoiding a disagreement down the road which can be distracting and bad for business. I also encourage tenants to always use their own broker when selecting a new space whether its large or small, if just for the reason as a second set of eyes on your side. If my sign is on the building you call my main job is to get the best deals for the building and having your own broker can reduce your exposure during the process. Good luck and enjoy your new lease.
Curt has been in the Indianapolis Real Estate business for over 10 years and spent his first years learning all aspects of commercial management and brokerage. He has had great success in managing existing commercial projects and new retail and office developments. Curt specializes in building owner representation and purchases in the Westfield Indiana market as well throughout the Indianapolis Metro area. Curt is passionate about growing the local Westfield community and in his free time volunteers with Westfield Youth Assistance and raising 2 children with his wife Jennifer.