Knowing and Understanding the Different Types of Leases:

Posted by Travis Tollefsen on Thursday, September 3rd, 2015 at 10:46am.

Leases for commercial real estate in Anchorage, Alaska can be broken down into three basic types: a gross lease or what is called a full service lease, a net lease, and a modified gross lease. Within these three types of leases there are further divisions that are based on two different methods of rent calculation, net and gross. A gross lease usually means that a tenant pays his rent in a lump sum, and the landlord pays the expenses of the tenant. With a net lease, the tenant is responsible for paying a base rent which is smaller, but is expected to pay some of the related expenses. A modified gross lease is a hybrid of these two. It is crucial to note that although terms can differ widely from property to property, this overview will discuss the general concepts that are common to all.


Gross Lease/Full Service Lease

With a gross lease, rent is all inclusive. From the rent monies received from his tenants, the landlord pays all or most of the expenses, including insurance, taxes, and maintenance. Cost of the custodial services and utilities are included in the rent payment.  As part of the negotiations in a gross lease, tenants should always make sure that it is clear who is responsible for paying the related expenses, as well as for covering expenses that are over and above certain amounts. For example, if the landlord is paying the utility bill but the tenant ends up using more than what is generally considered normal, an agreement might be included that stipulates the tenant paying for the excess.

One of the important benefits of a gross lease is that the tenant will almost always know what amount he needs to pay for a given period. This makes his cost planning a lot easier, especially when at the end of a period he isn't faced with the payment of an unexpected expense. Since the landlord is responsible for paying all expenses, the business owners can concentrate on running their business and not worrying about upkeep, maintenance, and other expenses.

Net Lease

With a net lease, a tenants are responsible for paying what is usually a lower base rent price plus a certain amount of the usual costs associated with expenses such as operations and maintenance. These can include insurance, property taxes, and maintenance of common areas. Net leases are further broken down into three types:

Single Net Lease (N Lease):  With this type of lease, tenants pay a base rent amount plus their share of property taxes, with the landlord paying all other related building expenses. Tenants are responsible for paying all utilities and janitorial services. 

Double Net Lease (NN Lease):  In a double net lease, the tenants pay their rent as well as their share of property taxes and insurance. The landlord pays for repairs to the structure and maintenance of common areas. Under this arrangement, the tenant is also responsible for all utilities and janitorial services.

Triple Net Lease (NNN Lease):  A triple net lease is perhaps the most popular types of net lease for a commercial freestanding building and retail space. With a triple net lease tenants pay part or all of the three "nets"--property taxes, insurance costs, and CAMS -- on top of his monthly rent. The cost of utilities and operating expenses that are used in common areas, such as that of a security guard would be included in NNN fees. Tenants are also, of course, expected to pay for their own occupancy, including janitorial and utility, insurance costs, and taxes.

Tenants are usually charged a percentage of the building's expenses based on the portion they occupy or use. These types of leases are generally considered more landlord-friendly, and as such tenants should be careful to review all of the terms in these leases, including caps that could be raised annually. They should also be aware that a NNN lease can fluctuate from month to month, given the variance in operating expenses, which makes forecasting for these expenses very tricky and often difficult.  NNN leases do have some tenant benefits, however. For example, since tenants see operating expenses they can note the difference between the actual costs and what they are being charged. These cost savings are passed to tenants rather than the landlord. Another benefit of an NNN lease is that the potential rent is lower since tenants have a greater responsibility for building expenses.

Modified Gross Lease

A hybrid between the gross lease (more tenant friendly), and a net lease (more landlord friendly) is a modified gross lease. Under a modified gross lease, rent is paid in one lump sum and often includes any or all "nets," insurance, taxes, and CAMS.  Utilities and custodial costs are usually excluded from rent, and paid by the tenant. These types of leases are more popular with tenants since they make for a friendlier agreement between the landlord and his tenant.

Summary

As is the case of entering into any type of contract, it pays to be educated in the different types of lease and what you will receive and be responsible for under each one. There are many factors such as market forces that affect the types of leases that are most commonly offered, but it's also important to understand that just as is the case with anything else, a competitive economy such as the one we are in now can affect how powerful your leasing dollar is at any one time towards getting what you want. In a given market, and all things considered, a tenant should be able to pay roughly the same amount for rent regardless of the type of lease they have. Whether you're in Anchorage, AK or anyplace else, make sure you know what you are agreeing to before you sign on the dotted line. You will be a happier tenant for the trouble.

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