Often when I send a leasing client a property report, the report will list lease rates for different properties, some of which are offered as MG (modified gross), while others are NNN (triple net). I find myself giving the standard speech about lease types, warning my client that the offered rate for a NNN lease does not include the triple net charges and that the two lease types cannot be compared without first determining what the triple net charges will be. After giving the speech for the umpteenth time, I thought I would just write a short explanation.
A Net Lease is one in which the asking rental rate is not inclusive of all the property’s operating expenses and the tenant will be expected to incur those costs during the term of the lease. Landlords typically bill their tenants each month for these extra expenses in addition to rent.
In a Single Net Lease (N), the tenant is obligated to pay rent, building services, such as utility services, janitorial and trash removal, plus property taxes. The landlord pays all expenses to maintain the building systems, such as the HVAC (heating, ventilating, and air conditioning) and the building itself, such as the roof, foundation and sidewalls.
In a Double Net Lease (NN), in addition to rent, building services, and taxes, the tenant also pays building insurance. The landlord pays to maintain the building and its systems.
In a Triple Net Lease (NNN), the tenant pays rent, building services, property taxes, and property insurance, plus building and systems maintenance costs over the term of the lease.
Full Service Gross
In a Full Service Gross Lease (FS), the asking rental rate includes all expenses of the property, including utilities, janitorial, property taxes, property insurance, and common area maintenance. However, some leases are offered as FS+e or FS+e,j, which means that the tenant also has to pay for electric or electric and janitorial. Tenants often want to find this type of lease so that they will not have any surprises down the road; however, this type of lease is becoming more and more rare.
Modified and Industrial Gross
A Modified Gross (MG) or Industrial Gross (IG) Lease refers to a lease pursuant to which the tenant agrees to pay only base rent during the first year of the lease, but in subsequent years, the tenant agrees to pay a proportionate share of the increase in the cost of operating the property. To accomplish this, a Modified Gross Lease or Industrial Gross Lease will use a Base Year. The Base Year is often the first calendar year of the lease. For example, if a lease term starts in June of 2015, the 2015 calendar year will be the Base Year. The landlord agrees that it will pay all operating expense of the building over the term of the lease so long as they do not exceed the amount paid in the Base Year. However, if operating expenses exceed those paid by the landlord during the Base Year, due to an increase in property taxes or property insurance for example, then the tenant is responsible to pay the difference between the actual cost of operating expenses and the Base Year expenses. In a multitenant building, this excess is pro rated according the each tenant’s proportionate square footage.
A Percentage Lease is a lease under which, in addition to the base rent, the tenant is responsible for paying a percentage of gross sales from the business that occupies the space. Percentage Leases are common in shopping malls or when the tenant is a high-end retailer, such as a jewelry store.
Regardless of the type of lease involved, the tenant in a multitenant building should be cognizant of Load Factors. The space inside the tenant’s suite is the usable square footage. However, since the tenant derives some benefit from the common area space (main lobby and entrance, elevators, stairwells, public restrooms, janitorial closets, vending machine areas, and corridors), he or she will also need to pay something for that space. Each suite is allocated a percentage of the common area. That percentage combined with the usable square footage equals the rentable square footage. Rent is paid on the rentable square footage. The difference between the useable and rentable square footage is the Load Factor.
In addition, all leases except Full Service Gross leases may have CAM (common area maintenance) charges added on. CAM’s refer to the cost of maintaining the parking lot, sidewalks, landscaping, signs and other items used in common by all tenants and are quoted on a square foot basis monthly.
When considering a lease, make sure your agent knows the total cost of the lease, including base rent, operating expenses and CAM charges.
Also, make sure you understand what your rentable and usable square footage is.
Only by understanding all the factors involved in a potential lease can you compare one proposed lease to another.
Gail Brown is a commercial real estate broker in the Phoenix-Metro area. Gail earned a Juris Doctorate from University of Richmond School of Law in 1987. She practiced law in Arizona for 8 years, specializing in banking law, commercial litigation and bankruptcy reorganization. Gail and her husband jointly owned and operated Brown’s Custom Fence Company for 13 years, starting in their kitchen and expanding to become Arizona’s second largest fence company. Prior to becoming a licensed real estate agent, Gail owned commercial property as both an investor and user. Call Gail today at 602.316.2519!