Commercial Real Estate has its own jargon and nuances. If you are not from the Commercial Real Estate world, there are certain terms and lease clauses that can add up to hundreds of thousands of dollars that you may not have expected or were not laid out for you. Let’s just touch on the most common terms.
When looking to lease commercial property, you will find a range of terminology to describe the type of lease being offered for each building. Leases range from a full service gross lease on one end of the spectrum to a NNN lease on the other end. There are a range of options in the middle of these two that are typically called a gross lease or modified gross lease.
A Full Service Gross Lease typically has one rate for the space that includes all of the expense of the space such as taxes, insurance, maintenance and utilities.
A NNN or Triple Net Lease listing states the base lease rate for the space and then will charge NNN fee or CAM (Common Area Maintenance) charges on top of the base rate. In this case, the NNN fee or CAM charges will be the owners actual cost of running the building and typically includes taxes, insurance and maintenance. Utilities are paid by the tenant based on actual use.
Unfortunately, the terminology does not accurately describe the full situation and the common interpretation to the terms Gross, NNN and CAM are very broad. You will need to review the lease to determine what expenses the tenant is required to pay. There are many variations on what is included.
Here are some commonly used lease terms:
Gross Lease: The tenant pays a set sum or “gross” amount for rent and the landlord pays all real estate expenses. Sometimes these leases will also include utilities.
NNN (Triple Net/Net Net Net Lease): A net lease under which the lessee assumes all expenses of operating a property, including both fixed and variable expenses and any common area maintenance that might apply. However, the landlord is responsible for roof repair/replacement and structural repairs. Referred to as a triple net lease or NNN. (This is customary in the western Michigan market; especially for industrial properties and single tenant properties.)
Absolute NNN Lease: No landlord responsibilities. Tenant is responsible for taxes, insurance and all maintenance (including roof & structure) exactly as if the tenant was the owner of the building. Practical Application: A building that was built for a specific tenant and use, i.e., Walgreens.
Percentage Lease: The lease rate paid by the tenant is based on a percentage of the monthly or annual gross sales made on the premises. Practical Application: This type of lease is used for retail leases. There is usually a minimum monthly rent set by the landlord.
Gross leases and modified gross leases associated with commercial real estate involve greater landlord responsibilities and expenses by the Landlord.
Ask your broker about the details of the properties that you are looking to lease. Make sure that when you are comparing properties, you understand if the rates are quoted as NNN or modified gross. This way you will be using your total cost of occupancy for comparison of different properties.
Practical Application: If the rate seems quite a bit lower than other properties, the NNN’s, operating expenses, CAM are most likely not included in the rate quoted.
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