As with most industry jargon, the terminology for commercial leasing can prove confusing. Below, we have broken down the two most common forms of commercial leasing to their basic fundamentals in an effort to better understand the pros and cons associated with each method.
A gross lease comprises of the tenant’s pro-rata share of operating expenses included within the gross rent. A true gross lease is a full service gross lease which includes everything except sales tax. A modified gross lease is where the tenant will pay the lump sum amount plus electric, janitorial or other direct costs such as parking.
Property Types. Industrial Properties, Classes B & C Retail and Office Space. ( In recent years, in reaction to a downward market, we have seen more landlords willing to partake in gross leases. Such efforts allow them to better compete, while making concessions for tenants.)
Advantages. Tenants often prefer gross leases because they know their set financial obligation from year to year. Furthermore, increases and inflation in property taxes, building insurance or operating expenses will not affect their obligation.
Disadvantages. Unfortunately for the tenant, the Landlord can benefit from the previous situation if operating expenses are trending down and they have a tenant locked in at a fixed rate with escalations.
TRIPLE NET (NNN) LEASING.
A net lease or triple net (NNN) lease breaks out the operating expenses from the base rent. The stated rent excludes the insurance, utilities, operating expenses and real estate taxes for the building. The tenant is then responsible for the payment of these costs either directly or as additional rent.
Property Types. Class A & B Retail and Office Space.
Advantages to Landlord. The landlord can pass through all operating expenses to the property including property management fees, salaries, etc… even the pension cost to employees managing the building!
Disadvantages. Tenants on this pass through have the ability to audit the operating expenses and make sure there are no discrepancies compared to what is stated in the lease and GAAP. It’s not so much a disadvantage, but rather a means to watch over a Landlord’s billing practices.