Understand Leasing Structures
Updated: Feb 23, 2022
In the spirit of renegotiating leases, let's talk about specifics and leasing structures. Many of my clients get confused about the lingo and expenses associated with leasing. They often ask, "What's the difference between NNN and gross?" or "What's CAM?" Since I'm here to help, let me explain.
One of the most common lease structures is triple net (NNN). "Net" stands for the expenses in addition to the base rent that are passed down directly to a tenant. It's often referred to as additional rent, and includes property taxes, building insurance and common area maintenance (CAM). Common areas may include shared hallways, bathrooms, parking lots/garages, landscaping, building conference rooms, etc.
Typically, these net expenses are added to the base rent monthly, although sometimes you may pay them quarterly or yearly. Triple net lease costs are usually attached to the square footage, such as, $5 per square foot (PSF). So, if a client is leasing 2,000 SF at a base rent of $11 PSF, the total cost with the additional rent would be $16 PSF with a yearly cost of $32,000. Once divided by 12, the monthly rent would be $2,667.
A gross lease is a more simplified version of the same lease structure. You still are paying the property taxes, building insurance and CAM, however, you are quoted a cost upfront that includes everything. Modified gross deals appear when the building owner wants the tenant to pay utilities or other additional expenses.
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 base rent and additional rent. However, tenants won't be able to audit maintenance costs to see if they are actually getting quality return for money spent.
If you have questions on which lease structure would work best for you and your business, give me a call (612-788-1552). I'm happy to help.
Jeff Salzbrun is the owner and broker of Commercial Equities Group (CEG). As a veteran-owned real estate brokerage, CEG has been involved in many 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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