So What Is The Best Type of Commercial Lease?

I realized that my blog post yesterday was titled NNN or Gross... What's The Best Type of Commercial Lease, but it never really said which type of lease was the best.  I explained the difference between the two types of leases and left it at that.  Well, as someone who hates false advertising, I offer my humble apologies.  Unfortunately, the answer is that it depends.  I know, you're wondering why you had to wait an extra day just to hear that 'it depends', but that's just how things work sometimes.

For the most part, landlords benefit from NNN leases and tenants benefit from Gross leases.  This is because in general expenses tend to rise.  When a landlord signs a NNN lease, and the property's operating expenses increase, the landlord is safe, and the tenant bears these costs.  When the landlord has a Gross lease and the expenses go up, the landlord has to eat all of the extra cost.  So to protect their downside, landlords are usually better off with NNN leases.

When a tenant has a NNN lease, and expenses increase, the tenant is responsible for all of the increased costs.  When the tenant has a Gross lease, and the expenses increase, they are not responsible for the additional costs.  So the tenant protects their downside with a gross lease.  There are exceptions to this rule though.  Sometimes it is possible for a landlord to benefit from a NNN lease or for a tenant to benefit from a Gross lease.

I have a very savvy client who had NNN leases on all of the office properties that they owned over the last several years.  This client happened to own one property that was being taxed at an unrealistic assessed value.  Realizing this, they renegotiated several of their leases from NNN to Gross.  As part of this negotiation, they increased the base rent by the amount of the then current expenses.  Then they went and appealed their property taxes, and won a huge decrease in their expenses.  Having Gross leases meant that they reaped all the benefits of the tax appeal, and they are much better off than they would have been with their old NNN leases.

So like I said, it depends.  If you are negotiating a commercial lease in Reading, PA, give me a call today.