Commercial lease terminology can be somewhat confusing. Let’s see if we can simply explain the concept of leasing. Costs associated with most commercial real estate leases can be broken into three areas.
*Base Rent
*Nets (NNN)
*Electric and Janitorial
How these costs are charged to the tenant can also be broken into three categories:
-Triple Net Lease, referred to as “NNN” (in a triple net lease), represents the three major “net” costs: property taxes, property insurance and common area maintenance (CAM)
- Modified Gross Lease, referred to as “MG” is where all (or part) of the above nets are included as part of the base rent.
- Full Service Lease, referred to as “FS” is where the base rent, the nets, electrical and janitorial are included in one price per square foot lease rate.
Triple Net Lease: A triple net lease requires a tenant to pay a low lease rate whil also paying other costs associated with operating and maintaining the space. In fact, with a triple net lease, the landlord will also pass on utility costs that are not separately metered, as well as all costs related to common area maintenance (CAM). The so-called CAM charges included all expenses involved in maintaining common areas such as water/sewer, trash, restrooms, landscaping, parking lots, fire sprinklers, the roof or anything that all tenants share.
Modified Lease: Unlike a triple net lease, the agreement includes one, two or all three of the nets as part of the base rent. It’s important not to assume what’s included and to ask your commercial broker what part of the nets have been included or modified. Typically a modified gross lease will include all the nets in the base rent but not electrical or janitorial.
Full Service Lease: This agreement is where the base rent covers all costs of the taxes, insurance, maintenance along with the utilities and janitorial. The tenant pays a pre-determined lease rate each month and there are no pass-through expenses for operating expenses. A pure full service lease is the best of all worlds for a tenant, particularly for a medical office tenant. The tenant only has to write one check per month, and the amount only goes up incrementally over time with the normal progression of rent. Monthly rent typically rises about 2 to 3% per year (althought that’s negotiable). The tenant doesn’t have to worry about getting hit later for extra costs such as utilities and the landlord handles all of the maintenance.
