Navigating commercial real estate leases can be complex due to the lack of a universal lease structure. Each lease has unique terms, clauses, and requirements. Most often the type of lease is relative to the property type. While it’s crucial for tenants to have an attorney review all leases, real estate professionals can provide insights and into common lease structures in the commercial market.
Types of Commercial Leases
Full Service (FS) Leases
The simplest lease type to understand is the Full Service (FS) lease, typically used in large multi-tenant office buildings. Tenants pay a base rent with no additional charges, as the landlord covers all other expenses, including utilities. Parking could be an additional charge.
Modified Gross (MG) Leases
Modified Gross (MG) leases can vary widely in definition. Generally, an MG lease means the tenant pays a base rent plus utilities or other specific services. Clarifying responsibilities between landlord and tenant is essential. MG leases are common in small multi-tenant office buildings and less expensive retail buildings. Parking could be an additional charge.
Triple Net or NNN Leases
Triple Net (NNN) leases, most often found in high-end retail and industrial buildings, are the most complex. In this situation, the tenant is responsible for almost everything. Tenants pay a base rent plus an additional fee for common area maintenance (CAM) fee, also referred to as pass-throughs. CAM fees cover property taxes, insurance, and maintenance and tenants are charged for their proportionate share of these fees based on cost per square foot. For example, a 10,000 SF industrial building renting at $15 per SF with an additional $4 per SF in CAM charges results in an extra $40,000 annually for the tenant. In a NNN Lease, it’s important to ask the landlord what future items and repairs, if any, are covered by the landlord, such as HVAC, plumbing, electrical, exterior walls, landscaping, paving, etc.
Key Considerations for Tenants and Landlords
It’s important to remember that these are just guidelines. Each lease should be analyzed individually. Small office buildings might have NNN leases, while large industrial buildings could be MG. Term, rent abatement, assignability, escalation clauses, options to renew, and personal guarantees are just a few important negotiating factors. A thorough understanding of these elements is crucial before signing any lease agreement, and a seasoned commercial real estate broker can guide you through various types of lease negotiations.
