When leasing commercial real estate, you may encounter terms like ‘triple net’ (NNN), ‘full-service’ (FS), and ‘modified gross’ (MG). As a business owner, these terms can seem confusing, especially when you’re focused on your core operations. However, understanding these lease types is crucial because they describe how landlords collect rent from tenants.
This article explains what each lease type means, highlights their pros and cons, and helps you decide which one might suit your business best.
Triple Net Lease (NNN)
A Triple Net Lease, often called NNN, requires tenants to pay operating expenses in addition to the base rent. The three “Ns” represent the following:
- Property Taxes: Tenants cover their share of property taxes.
- Building Insurance: Tenants contribute to the building’s insurance costs.
- Common Area Maintenance (CAM): Tenants pay for maintaining shared areas, including parking lots, hallways, and elevators.
In a Triple Net Lease, tenants manage their own space and handle all operating expenses, including property taxes, utilities, insurance, maintenance, and interior repairs. The landlord passes on costs that aren’t separately metered, along with expenses related to common area maintenance.
Advantages of a Triple Net Lease:
- Tenants may save money if costs for insurance, taxes, or CAM charges decrease.
- However, tenants are responsible for covering any increases in these expenses.
Modified Gross Lease (MG)
A Modified Gross Lease (MG) includes some or all of the “nets” (property taxes, building insurance, and CAM) as part of the base rent. It’s important to clarify which costs are included. Typically, a Modified Gross Lease includes all nets but excludes costs like electricity and janitorial services.
Full-Service Lease (FS)
A Full-Service Lease (FS) covers all costs, including taxes, insurance, maintenance, utilities, and janitorial services. Tenants pay a fixed lease rate each month, with no additional pass-through expenses. This lease type is particularly beneficial for tenants such as medical offices, as it simplifies payments and minimizes financial surprises. Rent usually increases by about 3% to 4% annually, although this can be negotiated.
Key Consideration:
- If CAM costs decrease, the landlord benefits from the savings, not the tenant. However, tenants may need to cover cost increases at the start of each year based on the base year established in the lease.
Important Considerations Before Signing a Lease Agreement
Understanding the differences between Triple Net (NNN), Modified Gross (MG), and Full-Service (FS) leases is essential. However, before you sign a lease agreement, consider the following:
Don’t Rely Solely on Verbal Agreements:
Landlords may describe the lease verbally, but what matters most is the written contract. As a responsible tenant, thoroughly review your lease agreement. Ensure you understand all provisions, and confirm that the lease type aligns with your business needs. Look out for any terms or conditions that might disadvantage you in the future.
Even after outlining all the information above, writing a letter of intent (LOI) can still seem daunting. That’s why the Leveraged CRE Team at Commercial Properties, Inc. is here to help locate commercial space for lease and assist in using a letter of intent to land such space. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
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