I started this out as a quick breakdown of some basic Tenants’ Rights in Commercial Leases. As I wrote the outline it became too much to condense into one blog. Because I view this as the one of the most overlooked and important factors in a business, I felt it necessary to include some of the most important things to know.
The more “Gross” the lease is the more financial burden and risk is on the landlord, while the more “Net” a lease is that burden shifts to the tenant. In a nutshell, the majority of the time if you are a tenant you want a Gross lease and if you are a landlord you want an Absolute NNN lease. Most of the leases we see fall somewhere near the NNN side of the scale.
What are the Most Common Types of Leases?
There are several types of leases with varying definitions depending on the landlord or even the market you are in. The most common types of Commercial Leases are:
Gross Lease – The landlord pays directly all operational and ownership costs connected with the building in a gross lease. These typically include property taxes, property insurance, and any number of expenses including but not limited to maintenance, landscaping, repairs, trash removal, and utilities. In a full-service lease, which is something very typical with US General Service Administration (GSA) leases and co-op spaces, the tenant pays one amount to the landlord on a monthly basis that includes all the items detailed above and can include utilities, phone systems, janitorial, and more. Landlords with gross leases must absorb all tax and insurance increases, repairs of short- and long-lived items, and capital expenditures over the entire term of the lease.
Single-Net or Net: In addition to base rent, in a single-net lease, the tenant pays some or all the property taxes, insurance, and/or maintenance. “Single” refers to one operating expense item being reimbursed. This is very rare to see in the market, however.
Double-Net (NN): Typically, a Net-Net lease means in addition to the base rent, the tenant pays for property taxes, property insurance, and the landlord pays for maintenance, utilities, repairs, and capital expenditures. A double-net lease is sometimes referred to as a modified gross lease.
Triple-Net (NNN): A triple-net lease calls for the tenant to assume all expenses of operating a property, including fixed and variable expenses and any common area maintenance that might apply, potentially including HVAC, plumbing, and electric systems. However, the landlord remains responsible for structural repairs, utility lines to the property, and sometimes site improvements, such as parking, landscaping, and site lighting.
Absolute Triple-Net: Generally, in this agreement, the landlord has no expense or capital responsibilities. The tenant is responsible for taxes, insurance, common area, and all repairs and maintenance, including the roof and the structure.
Common Area Maintenance and Expenses: In most cases, the landlord is responsible for the maintenance of the property, but the tenant will pay a pro-rata share of the expenses related to the maintenance. For instance, if a tenant occupies 2,000 SF in a 10,000 SF center, that tenant will generally be responsible for 20% of those expenses. Typical expenses that are charged back to the tenant in this scenario are the following: real estate taxes, property insurance, snow plowing, landscaping, cleaning of common areas, window cleaning, common area utilities, property management, and in some cases the capital costs associated with parking lot repairs, roof repairs, HVAC, and other costs. It is important to understand not only what you are paying for but also to make sure the controllable expenses are capped at a reasonable dollar figure.
Usable vs Rentable Square Footage: Typically, this applies to office buildings and this is something that you should know prior to getting into a lease. The usable square footage is the actual space you will occupy versus the rentable square footage is the usable square footage plus your proportionate share of the common areas. For instance, if your unit is located within a portion of the second floor of a multi-tenant office building examples of shared space might be hallways, restrooms, stairways, lobby area, storage rooms, elevator rooms, etc. This can be as high as 20% more than the space you are using within a building. It is important to find out before entering into negotiations what the ”add-on-factor” is for the building.
Aaron McDermott, CCIM, LEED GA
Latitude Commercial provides commercial real estate services such as purchasing, leasing, tenant representation, and property management throughout Northwest Indiana and the Chicago Suburbs. To find out how we can help you find a new home for your business, call us today at (219) 864-0200.