The second blog I wrote for CEG was "Understanding Leasing Structures," back in October of 2021. Given the number of questions I receive around leasing structure terminology, I thought it would be a good topic to revisit.
Here are five things to keep in mind when understanding lease structures:
1. One of the most common leasing structures is triple net (NNN). "Net" stands for the expenses in addition to the base rent that are passed through directly to a tenant. It's often referred to as additional rent and includes property taxes, building insurance and common area maintenance (CAM), therefore triple net.
2. Common areas may include shared hallways, bathrooms, parking lots/garages, landscaping, building conference rooms, mechanical rooms, etc. With NNN leases, tenants pay CAM, a pro rata percentage for maintenance of those common areas. Typically, these net expenses are based on an annual budget and added to the base rent monthly.
3. A full gross lease is a more simplified version of the NNN lease structure. You still are paying the property taxes, building insurance, and CAM, however, you’re quoted a cost upfront that includes everything.
4. Modified gross leases and double net leases appear when the owner and tenant are both responsible for paying building expenses, usually a result of negotiations. For example, a tenant may pay utilities and maintenance per square foot, and the owner may pay insurance and taxes.
5. A single net lease is when the tenant is required to pay just the property taxes in addition to rent. It’s the least risky for a tenant, however, not very common.
Sometimes you may find a property where the additional expenses are negotiable or specific like electric. However, most lease deals are NNN or full gross.
Both structures offer protection for the tenant and landlord, but in different ways. Triple net leases protect landlords because if operating costs go up, tenants automatically pay the increase. Tenants on the other hand, can audit whether CAM costs are in line with the maintenance they see. Gross leases are easy to understand as there is no talk of two types of rent. But tenants won't be able to audit maintenance costs to see if they are actually getting quality return for money spent. And owners may have to pay out of pocket –– like this year with higher utility and snow removal costs because of our top three snowiest winter!
Jeff Salzbrun is the owner/broker of Commercial Equities Group (CEG). As a veteran-owned real estate brokerage, CEG has been involved in thousands of sale and lease transactions, ranging from single offices to 250,000+ square foot buildings. At CEG, we get your deal done. We know space, and we know the CRE business.
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