As a tenant, it is important to understand the type of lease structure the landlord is proposing and how it will impact your bottom line. There are 3 primary types of leases – Gross, Full Service and Net – as well as modified versions of each.
Gross Lease: A lease in which the tenant pays a flat sum for rent out of which the landlord must pay all expenses such as taxes, insurance, maintenance, utilities, etc.
Under this lease structure, all the tenant is responsible paying for is their stated rental rate, all other expenses are borne by the landlord.
Full Service Lease: A lease which the tenant pays an all-inclusive rental rate which includes operating expenses and real estate taxes for the first year or the "Base Year".
Under this lease structure, the tenant pays the base rent in the first year, but then also is responsible for reimbursing the landlord for any costs over a Base Year or a predetermined Expense Stop.
Variations of the Gross or Full Service lease
Sub-variants of Gross (i.e. a “Modified Gross” lease) or Full Service Leases will feature much of the same structure outlined above, but have one or more expense items which are excluded from the clause. For instance, an industrial Modified Gross lease could require that the tenant pay for utilities and/or real estate taxes in addition to their Base Rent.
Net Lease. Indicates a lease in which the stated rent excludes the insurance, utilities, operating expenses and real estate taxes for the building. The tenant is then responsible for the payment of some (or all) of these costs either directly or as Additional Rent.
Under this lease structure, the tenant is responsible for paying their Base Rent, as well as certain operating expenses and real estate taxes.
Variations of the Net lease
Sub-variants of the Net Lease structure include Modified Net, Double Net or Triple Net.
Modified Net and Double Net are instances where most operating expenses are paid directly by or reimbursed by (an expense “ Pass Throughs“) the Tenant. For example, the tenant could be responsible for their own utilities and reimbursing the landlord for Common Area Maintenance (“CAM”), but the landlord is solely responsible for paying the real estate tax bill.
Under a Triple Net or "NNN" Lease, the tenant is responsible for paying and/or reimbursing the landlord for all operating expenses and real estate taxes. Capital expenditures (i.e. expenses which are typically depreciated over a period of greater than 12 months) are usually excluded from the property’s operating costs, but it depends on exactly how the lease defines capital expenditures.
A fourth, less common lease structure is a Percentage Rent structure whereby the rental payment is based upon a percentage of the tenant’s sales volume. This lease structure is usually used in retail environments. Percentage rent can be used in tandem with a lease structure above, whereby the tenant pays Base Rent and a percentage of sales.
Understanding exactly what your lease’s structure is an important variable in determining the most cost effective lease proposal.