If you have called a “For Lease” sign then you most likely have heard one of these terms before. And, if you don’t know what the difference is, you would assume it is just real estate jargon. The difference in these two types of leases can be a drastic difference in price and your responsibilities as a tenant.
A gross lease is the most uncomplicated of the two general leases found in retail properties. In a gross lease, a tenant pays a base rent price per square foot. In addition to the rent the tenant pays janitorial for the interior of the space, utilities, garbage, and in some cases water. The landlord pays for property insurance, taxes, and maintenance. There can be an addition fee called a CAM (Common Area Maintenance). This addition fee is generally low ($.03 – $.30 per square foot) and covers the cost of maintaining the common areas of the property, i.e. parking lot, gardening, HVAC that may service more than just one space, common restroom janitorial, ect..
In a gross lease, if there is a major problem with plumbing, roof, or structural building elements, the LANDLORD pays to correct these items and is responsible for the maintenance and replacement of items such as HVAC (in most cases). This type of lease can be great for both tenant and building owner. The building owner can maintain the property to their standards and not have to worry about a tenant neglecting building issues. The tenant does not have to invest money into a building they do not own and the tenants’ financial exposure is greatly reduced.
Triple Net (NNN) on the other hand opens the tenant up for much more exposure. In this case the landlord now charges an addition fee per square foot, on top of the base rent, and on top of your utilities, known as the Triple Net. Nets can range from $.15 to $1.15 per square foot in the Tri-Valley. This fee can change year to year and is most often a direct pass through expense of the actual costs to maintain the center. The tenant should have a right to audit the NNN expenses. Some landlords agree to cap the amount a “NNN” can increase each year, although this can be a tough battle given this is supposed to be direct pass-through expense. If water, garbage, or electricity prices go up should the landlord have to eat the cost? What is included in the NNN?
– Property taxes
– Property insurance
– Structural Maintenance
-Cost to maintain and operate common areas (lighting, garbage, landscaping, common halls and spaces)
-Property management costs (may or may not be applicable)
The tenant is responsible for major mechanical, electrical, and plumbing in a triple net lease. If a pipe breaks within your space, you, the tenant, will incur the cost to fix it. In most cases the tenant is responsible for maintaining the HVAC too. A net lease is prevalent in 99% of shopping centers and 80% of storefront downtown type buildings and strip centers.
What makes the Triple Nets so expensive? The number one reason is property taxes. Just like a house, when a building is sold, the title changes hands, or building is re-built or remodeled, the county tax assessor will adjust the value often times raising the tax base. This tax base is then passed on to the tenant under a triple net lease.
A Full Service lease is often found in office buildings and almost never applies to retail properties. A full service lease includes all taxes, insurance, building maintenance, utilities, garbage, PLUS your base rent all in one price per square foot.
Now here comes the disclaimer. I am not an attorney and practically every lease is different from the last. Obligations, costs, and exposure will change from building to building, lease to lease. When signing any legal binding contract I highly recommend a real estate attorney review the document. This will allow you, whether tenant or building owner, to fully understand your rights and obligations under the contract.