Signing a lease can be an intimidating process. What are my real costs? Who is paying for what? Among the additional expenses added to the base rent, Common Area Maintenance (CAM), taxes, insurance, janitorial costs, or refuse costs are the most common. The key is to understand the terms used in a lease. There are many variations, but the three most common lease types are Full Service Lease, Modified Gross Lease, and Triple Net Lease.
A Full Service Gross (FSG) lease includes all CAM, Taxes, and Insurance. In addition the landlord provides all utilities and janitorial expenses. The tenant is not charged with an additional amount until the total building expenses exceed a maximum amount called a rent stop. Full Service Gross leases are common with multi-tenant office properties. This type of lease is the most indicative of the total costs incurred.
Triple Net Leases (NNN) are on the opposite side of the spectrum. The rent quoted does not include additional expenses incurred in the building. All things being equal, a NNN lease will be the lowest lease quoted. However the expenses must be determined and added to the net lease in order to “gross up” the lease for comparison purposes. These types of leases are the least indicative of the total costs incurred in the building. The tenant needs to determine the additional costs in order to compare with other types of leases.
A Modified Gross lease falls somewhere in between. The landlord is responsible for common area maintenance. The tenants contract their own utilities, janitorial and refuse service. These leases also have a rent stop, and once that is exceeded, additional expenses are added to the base rent. These types of leases are common in multi-tenant properties, and are quoted with base rent only.
So, how do we determine which lease is the best deal? At first, it may seem that the net lease is the lowest cost. However, most likely, the total cost among the several different lease types is the same. This is due to the fact that the cost encumbrance for various cost items can shift from one party to the other, depending on the lease type.
Here is an example how various lease quotations can look very different depending on the lease type:
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It is important to remember that landlords compete in the open market for tenants to occupy their properties. It is unlikely that asking leases will be that different in a competitive market. The idea is that different lease types will convey different costs until all the expenses are considered.
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