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Breaking down commercial leases
By Rob Blundred
Locating the perfect commercial space to house your business can be exciting. You begin envisioning the business living and growing in your new space. But before you can start moving in, you need to agree and sign a commercial lease.
Leases can be tricky, confusing and overwhelming. With help from research tools from 42 Floors, we’ve outlined several different types of commercial leases. The three most common are net lease, absolute triple net lease and modified gross lease. Each comes with challenges and benefits.
The benefit of a net lease is that the landlord can charge a lower base rent price. However, along with the base rent the tenant is responsible for an “additional rent fee” which covers the operations and maintenance of the property. These costs can cover real estate taxes, property insurance and common area maintenance (CAM) items. The CAM fees cover the landlord costs for janitorial services, property management fees, sewer, water, trash, landscaping, parking lot, fire sprinklers and any shared area or service.
There are several types of net leases:
Single net lease (N lease)
In this lease, the tenant pays base rent plus their pro rata share of the building’s property tax (meaning a portion of the total bill based on the proportion of total building space leased by the tenant). The landlord covers all other building expenses. The tenant also pays utilities and janitorial services.
Double net lease (NN lease)
The tenant is responsible for base rent plus their pro-rata share of property taxes and property insurance. The landlord covers expenses for structural repairs and common area maintenance. The tenant once again is responsible for their own janitorial and utility expenses.
Triple net lease (NNN lease)
This is the most popular type of net lease for commercial freestanding buildings and retail space. The tenant pays all or part of the three “nets” – property taxes, insurance and CAMS – on top of a base monthly rent.
Absolute triple net lease
The absolute triple net lease is an extreme form of an NNN lease where the tenant absorbs all of the real estate risk and responsibility. The tenant is ultimately responsible for all building-related expenses and repairs, including roof and structure.
Modified gross lease
The appeal of a modified gross lease is the tenant has one set amount to pay each month. In a modified gross lease the base rent and “nets” (property taxes, insurance and CAMS) are all included in one lump sum payment, excluding utilities and janitorial services, which are typically covered by the tenant.
The benefit of a modified gross lease is flexibility. They are generally an easier agreement to make between the landlord and tenant. The risk is if insurance, taxes or CAM increase or decrease the cost or savings is passed on to the landlord.
Net leases will always have a lower base rent rate. When comparing a net lease space to a modified gross lease space be certain you are calculating all your additional rent expenses so you can make an accurate comparison between the lease spaces.
Whether finding your first commercial space or moving a growing business into a new home, negotiating a lease can be challenging. The most important advice is to make sure to read through the commercial lease diligently and carefully. Include all your costs for a space (rent, additional rent, utilities and trash). Market and area trends tend to keep similar spaces at comparable lease rates regardless of the lease type. With proper lease understanding you can move confidently into your new business home.
About the Goering Center for Family & Private Business
Established in 1989, the Goering Center serves more than 400 member companies, making it North America’s largest university-based educational non-profit center for family and private businesses. The Center’s mission is to nurture and educate family and private businesses to drive a vibrant economy. Affiliation with the Carl H. Lindner College of Business at the University of Cincinnati provides access to a vast resource of business programing and expertise. Goering Center members receive real-world insights that enlighten, strengthen and prolong family and private business success. For more information on the Center, participation and membership visit goering.uc.edu.