For many of our clients, renting an apartment is the only experience they have with rental property before they begin their search for commercial lease space. Apartment leases are usually “modified gross” leases, meaning the tenant pays the stated monthly rent plus utilities, and the landlord picks up all other expenses associated with the space. Commercial leases are different. The landlord typically seeks to have the tenant pay the stated rent plus all associated expenses, while the tenant wants the landlord to pick up these expenses. Obviously, the parties interests are NOT aligned. But, with a bit of negotiation, we can usually satisfy even the most diametrically opposed tenant and landlord. Know the options and work with an experienced real estate broker so you don’t get burned! With that said, let’s explore the most common types of commercial leases:
NNN or Triple Net Lease: In a NNN Lease, the landlord “nets out” or passes the operating costs on to the tenant. The NNNs usually stand for insurance on the building, real estate taxes, and common area maintenance (janitorial service, trash removal, landscaping, snow removal, and upkeep of lobbies, elevators and monument signs). Each tenant pays its proportionate share of these expenses. In other words, if you lease 28% of a building, you would pay 28% of the NNN expenses, in addition to the “base rent”. (The tenant typically also pays for its utilities.) The NNN lease protects the landlord from unexpected expenses by shifting that risk to the tenant. Consequently, the tenant may try to limit its upside exposure to a certain percentage.
The Gross Lease: The “Gross Lease” is the tenant’s dream deal. The tenant pays a flat amount each month. The landlord pays all NNN expenses associated with the property.
Modified Gross: A “Modified Gross” lease entails the tenant paying the “base rent” plus some of the landlord’s operating costs. These leases are often the product of negotiations that started with a gross or NNN lease.
Percentage of Rents: With a “Percentage Lease,” the tenant pays “base rent” plus a percentage based on monthly sales volumes. Percentage leases are commonly executed in retail malls. In return, landlords often accept a greater financial burden such as paying for tenant build-out costs.
Always Spell Out Who is Responsible for Repairs: Regardless of the type of lease being used, be sure to spell out which party is responsible for what in terms of repairs and replacements. Repairs can represent a significant expense and outlay of time and energy. A common allocation is that the tenant makes repairs to the interior walls and fixtures, and performs annual maintenance of the HVAC system; while the landlord is responsible for the exterior walls/roof of the building, and the replacing building systems such as HVAC and plumbing. Each party should agree to take care of its responsibilities in a timely manner, and include penalties for failure to do so.