What Are The Different Lease Types For My Business?
Thinking about leasing space for your business? Have you heard the terms, “Full Service Gross,” “Modified Gross” and/or “Triple Net” and don’t know what to think? If so, you’re not alone – but wait – there’s good news! The basics of these common commercial lease types are not quite as intimidating as they might sound.
In general, the major differences between the three lease types relates to who is responsible for paying for the building operating expenses – Landlord or Tenant. Here are a few definitions that will help in understanding the different lease types:
Common Area Maintenance (“CAM”) – CAM’s typically include property taxes, building/project insurance (tenants are responsible to obtain their own separate insurance for the leased premises), landscaping, exterior lighting, common area utilities, building and parking lot maintenance, fire sprinkler systems, water and property management fees. CAM’s are essentially the general operating expenses for a building or project.
Base Year Expense Stop (applicable to MG and FSG Leases) – Typically the year in which you execute your lease will be considered the “Base Year.” If you sign more than half way through any given year, you should negotiate the following year as your “Base Year.” In the Gross Leases (MG and FSG defined below) there is a certain level (or maximum amount) up to which the landlord will pay certain CAM’s for the building (“Expense Stop”). If the CAMs exceed the Base Year Expense Stop in subsequent lease years (the years that follow your Base Year), the higher amount is passed through on a pro rata basis to the tenants of a building and become the tenants’ responsibility. In the Las Vegas market, Base Years are generally calendar years (January – December).
Bob signs a MG lease (explained below) with a 2015 Base Year. The Expense Stop for the lease is $1.00 per square foot for 2015. This means the Landlord will pay the first $1.00 per square foot of the annual CAMs every year of the tenant’s lease term. If in 2016, the CAMs increase to $1.10 per square foot, the $.10 difference will be passed through to the tenants of the building on a pro rata basis, based on the square feet each tenant occupies.
Now…with all of that cleared up, here’s a quick and dirty breakdown of the three lease types:
Triple Net Lease (“NNN”):
In a NNN lease, the tenant is responsible for Base Rent and their pro-rated share of the CAMs; in addition, the tenant is also responsible for utilities and janitorial to the tenant’s premises. In other words, the Tenant pays for pretty much everything. You’ll have a Base Rent (price to rent the physical premises) and Additional Rent (CAMs and potentially other fees such as late fees, additional admin fees, etc.) and separate janitorial and utility bills. As the tenant, you will send the Landlord two different checks each month (Base and Additional Rent) and then pay for the other services on a piecemeal basis as you would on your home. Rental rates are quoted on a monthly basis in the Las Vegas market. The primary advantage to an NNN lease is transparency; all of the building’s operating costs are available for the tenant’s review. The primary disadvantage is that the CAMs are not guaranteed in the Lease and are subject to increase or decrease, the former being much more typical and the Landlord does not cover any of them. The NNN lease is commonly found in a retail setting (i.e. restaurants, coffee shops, clothing stores, etc.), industrial, and in some cases, office leases. It is also worth noting that in many retail leases, the Landlord will request (or demand) Percentage Rent on top of everything else.
Modified Gross Lease (“MG”):
MG leases build the CAM charges into the Base Rent. All MG leases contain a Base Year Expense Stop to protect the landlord against increasing operating costs. Like NNN leases, the tenant will be responsible for utility costs and janitorial services to the tenant’s specific premises. MG and FSG leases are commonplace when looking for office space.
Full Service Gross Lease (“FSG”):
In FSG leases, Base Rent, CAMs, all utilities, and janitorial services to both building common area and tenant premises are bundled into one rental payment, Base Rent (normally each tenant pays for the costs of phone/data/suite security separately). Think of an FSG lease as an “all-inclusive” resort vacation. You pay one set price per square foot for almost everything involved with the rental of your space. This allows you to easily budget for your rent for years to come. The downside to FSG (and MG) leases are annual rental escalation increases that are typically based on a higher rental rates/dollar amounts versus NNN leases because operating expenses are included in the Base Rent.
Bear in mind that these definitions, explanations, and examples are provided to give you a very general idea of what to expect in each of these lease types. For the most part, commercial leases are quite complicated, can be difficult to comprehend and may be viewed as the cure to insomnia. That said, you should always have an attorney review any lease agreement you are thinking about entering into. We’ve seen too many good folks get into bad lease situations, which may have been prevented if the tenant fully understood and/or negotiated the terms of their lease.