Know Your Lease Types: Triple Net (NNN), Full-Service, and Modified Gross
If you are leasing a commercial real estate space, chances are, you have encountered these terms: ‘triple net’ (NNN), ‘full-service’ (FS), and ‘modified gross’ (MG).
As a business owner, technical terms like these can often be confusing and overwhelming, when all you just want to do is offer your products or services. But with the right amount of experience and knowledge, you can grapple what these terms technically mean. To oversimplify, they are terms in commercial leasing that provide a variety of ways for the landlord to collect the rent from their tenants.
Now, if you are a beginner in the industry and clueless on what these terms refer to, then this article will give you an overview on what these terms really mean, along with the pros and cons that come with each of these lease types and which one may be the best one for you and your business.
The words "Triple Net" is used commonly when dealing with commercial real estate because no matter which type is used to take a lease, the landlord has the Triple Net's to deal with. They are getting paid regardless how you, the tenant, feel about it. Typically the Triple Net's are a pass through cost that the landlord passes on. These costs are seldom marked up as a profit center for the landlord.
Overall, when it comes to these lease types, the main differences are how the landlord collects the rent to be reimbursed for the expenses of the project. In the end, the tenant pays roughly the same amount but with small differences based on the building type and tenant use.
Costs associated with most commercial real estate leases can be broken into three areas:
- Base Rent
- Triple Nets
- Electric and Janitorial
Let us start with the Triple Net Lease or NNN.
Triple Net Lease (NNN)
The Triple Net Lease, or often referred to as NNN, refers to the lease type where the tenant pays for the operating expenses outside of the base rate. The 3 Ns stand for the three “nets” in the lease which tenants are paying, namely:
- property taxes
- building insurance
- common area maintenance (CAM)
- Common area refers to the entire area shared by all tenants and the corresponding facilities that come with it. CAM may include the maintenance of the property’s receiving space, water, parking lots, hallways, elevators, common bathrooms, roof and others. CAM expenses are typically distributed to all tenants occupying the property under the Triple Net Lease.
A triple net lease is one in which the tenant pays all the ongoing operating expenses. The landlord/owner charges an annual base rate plus a pass-through cost of the three major nets. Other costs such as utilities, janitorial, internet, phone, etc. are not included in the lease rent. In its purest form, a Triple Net Lease is where the tenant manages the property/space, doing everything from paying all the operating expenses, property taxes, utilities, insurance premiums, maintenance, and interior repairs. 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). These so-called CAM charges include 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 Gross Lease (MG)
Unlike a triple net lease, this 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 include electric or janitorial.
Full-Service Lease (FS)
This agreement is where the base rent covers all costs of 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 3% to 4% per year (although 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 so the tenant can focus on growing their business. One thing to note is if the yearly costs for CAM’s go down, the savings go directly into the landlord’s pocket. If the costs go up, the tenant is responsible for paying the difference at the beginning of each year over the base year that was established in their lease.
Benefits of a Triple Net NNN Lease
The nice thing about a triple net lease is the potential savings you could have in the event the costs for the insurance, taxes, or CAM charges were to come down. In this case those savings are passed on to the tenant. Likewise, the downside of a triple net lease is that if expenses go up, those expenses as well are passed on to the tenant as a higher net cost.
Other things to Consider Before Signing Lease Agreement
By now, you may have already understood the three basic lease structures in the market and what each entail on you, based on your business type or preference. You may have also decided by now on the lease type to employ for your business.
But before signing your lease agreements, here is one more crucial thing for you to consider: never solely rely on verbal agreements on what your landlord identifies the lease type to be. At the end of the day, these are just terms that may be used to verbally characterize a lease type, but what is more important is what’s on paper.
As a sensible tenant, you still need to thoroughly go through your lease agreement before signing, understanding all the provisions included, and making sure that indeed, you are signing into a lease type of your choice without any suspicious terms and conditions that may put you on a disadvantage in the future.
Even after outlining all the information above, knowing these lease types in commercial real estate (CRE) can still seem daunting. That’s why the Leveraged CRE Investment Team at Commercial Properties, Inc. is here to help you achieve your leasing goals. Contact us at (480) 330-8897 or send us an email at email@example.com.
Need help on how to get started investing in commercial real estate? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!
Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
Bookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCRE