Triple Net, Modified Gross, Full Service - Commercial Leases Revealed
Really interesting post I'm not sure too many people are talking about? With so many homes now being leased and rented out it helps to know your options and what you're really willing to pay for.
Triple Net, Modified Gross, Full Service - Commercial Leases Revealed
In addition to representing clients in the purchase and sale of homes and multi-family properties, our Team also has a strong representation of commercial clients seeking space for their new business, expansion of their existing business, warehouse and storage, and the like. We feel it is important to
explain the differences that exist in commercial leases with regard to the expense provisions in those leases. A lot of people just don't understand these various provisions and when we educate them they are shocked at how simple it all really is. So...here it is...Triple Net, Modified Gross, Full Service - Commercial Leases Revealed!!
There are primarily 3 different clauses in commercial leases covering a tenants obligation or lack of obligation to pay for certain property related expenses. Each may have subtle differences of its own, but for the sake of simplicity we will keep it to these 3:
- Triple Net. Or you may have seen it referenced as "NNN." What this means is that the tenant is obligated not only to pay for its own utilities and janitorial for its interior space, but they are also required to pay their share of the landlord's expenses for property taxes, insurance and common area maintenance. Common area maintenance includes any and all expenses in maintaining, managing and repairing the areas outside the tenant space, including parking lot lights, landscaping, cleaning, roof, walls, etc. If it is a multi-tenant property, the tenant will pay its pro rata share of all of these expenses based on the square footage of the tenant space over the square footage of the entire improvements for lease. There are subtleties as I mentioned above which are subject to negotiation, such as limiting increases in property taxes due to change of ownership, limiting the landlords ability to charge for full management fee or capital improvements, capping the overall expense increases year over year by a certain percentage. Triple net leases are seen mostly in retail and industrial leases.
- Modified Gross. This means that the tenant is obligated to pay for its own utilities and janitorial to its premises and the landlord will pay all other expenses of the property itself. In the event that it is a multi-tenant property and certain utilities are not separated for each tenant to pay directly, the tenant will be obligated to pay the landlord its pro rata share of those shared expenses. But the intent is the same in that the tenant is obligated to pay its own premises expenses. Modified Gross leases are typically seen in smaller garden style office leases and sometimes smaller flex type industrial properties.
- Full Service. Or sometimes referred to as Full Service Gross. These leases are a bit as they sound. The landlord is obligated to pay for any and all costs and expenses associated with the property and the premises including utilities and janitorial to the space itself. A lot of times the variation of this lease type is used by landlords which is called "Full Service Gross over Base Year (or Expense Stop). What this variation says is that the landlord will pay for all costs, but the tenant will be obligated to pay for its pro rata share of any increase to the overall costs and expenses of landlord over a certain year or dollar amount that is set when the lease is signed. For example, if a tenant signs a lease in 2013, the lease states the Base Year to be 2013, expenses for 2013 were $100,000, then at the end of 2014 if the expenses are over that Base Year amount of $100,000, the tenant shall pay its pro rata share of any dollar over that Base Year amount. You will see this lease type mainly in your standard general class A and B office buildings.
We really hope this simple 3-point discussion above of the Triple Net, Modified Gross and Full Service commercial lease types will help you either with your commercial clients or give you confidence to talk the commercial talk when you refer the business to a commercial agent.
Triple Net, Modified Gross, Full Service - Commercial Leases Revealed
JAY & MICHELLE LIEBERMAN
Broker Associates
Coldwell Banker Westlake Village
Cell: (310) 849-2282
Office: (818) 874-9441
DRE #01874717
DRE #01910290
Feel free to read my post on the Anatomy of a Commercial Transaction to learn about the material factors and documents involved in the purchase and sale of a commercial property.
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