Industry jargon. Commercial real estate is chock-full of it. Whether you have negotiated a commercial lease before or it’s your first time, chances are you will run into some potentially... Read More
In commercial real estate, a full service gross lease (which may also be called a full service lease, or a gross lease) is a lease agreement in which the tenant is responsible only for the base rent, while the landlord must cover the operating expenses. Now let’s go into some more detail about what that means.
What are considered operating expenses?
“Operating expenses” refers primarily to major additional costs in commercial real estate that include utilities, property taxes, insurance premiums and maintenance for the building. These critical expenses can be paid for either by the tenant or the landlord, based on what both parties have negotiated in the lease agreement.
Advantages of a full service gross lease
A full service gross lease can appear very attractive to potential tenants initially. It is one of the most straightforward lease options, since tenants only have to be focused on paying the base rent and not having to worry about all of those extra expenses. It is also nice to have one predictable rental amount to pay each month—whereas operating expenses like utilities and maintenance often fluctuate, creating some uncertainty about exactly what the financial obligations will be each month.
However, the downside for the tenant is that they may actually end up paying more overall with a full service gross lease. The reason for this is because the property owner, not wanting to risk getting stuck paying too much for the operating costs, may make the monthly rental fee significantly higher.
Modified gross lease
If a landlord wants to pass on a portion of the responsibility for paying operating costs to the tenant, an alternative to the full service gross lease is a modified gross lease, which has some similarity to the type of residential lease that many people get when renting their home. This more flexible commercial real estate version of the lease allows the property owner to specify exactly which additional expenses that the tenant will need to take responsibility for, in addition to the base rent.
The flexibility of the modified gross lease means that the landlord has quite a bit of leeway in what extra operating costs they can include—but, most typically, it is something like utilities and cleaning services. Tenants are often used to paying for these costs, and most don’t consider them to be too onerous. Cleaning costs are at least predictable, and utilities tend to follow a pattern as well, so there aren’t usually too many surprises from month to month.
Is a modified gross lease different than a triple net lease?
Both a triple net lease (also sometimes called an NNN lease) and a modified gross lease pass on operating costs to the tenant. However, the triple net lease is quite a bit more cumbersome for the tenant. A triple net lease expects the tenant to pay base rent plus property taxes, building insurance premiums, and maintenance & upkeep costs.
While the modified gross lease presents the property owner with an opportunity to stipulate that the tenant must pay some operating costs, as explained above, it is usually comparatively less responsibility, like just paying utilities each month in addition to the rent.
What other types of commercial leases are available?
In addition to the full service gross lease, the modified gross lease and the triple net lease, two other notable types of leases for commercial properties are the single net lease and the double net lease. The single net lease is somewhat similar to the full service lease, since the main responsibility for the tenant is the rent – however, with the single net agreement, the tenant must also pay annual property taxes. But no other operating costs fall to the tenant with the single net lease.
The double net lease (sometimes called NN or net-net lease) is an agreement that instructs the tenant to pay for rent, annual property taxes and insurance premiums for the building. Under a double net lease, the tenant does not have to shoulder the burden of the maintenance costs, though.
Read the fine print
There are a lot of different types of commercial real estate leases out there, so this can get rather confusing! It is always important that you read and review your lease carefully before you sign. In addition to the monthly rent, what other costs – if any – are you expected to pay? Are you comfortable with the terms?
Bear in mind that you can often negotiate with the landlord on which operating costs you are willing to pay. If you don’t mind paying a higher rent instead, the property owner may be willing to retain the responsibility of all or most operating costs.
Commercial leases at a glance
To help you keep the different types of leases straight, here is a clear list of the five we have discussed in this piece:
- Full service gross lease (also known as full service lease or gross lease): Tenant only pays the base rent, while the landlord takes care of all operating costs
- Modified gross lease: This is a lease where the tenant pays the rent, as well as a portion of the operating costs, usually utilities and cleaning services
- Single net lease: With a single net lease, the tenant pays the base rent each month, plus annual property taxes. The landlord handles the building insurance premiums and deductibles, as well as all maintenance costs.
- Double net lease (also known as NN or net-net lease): The tenant takes on the responsibility of monthly rent, annual property taxes and insurance costs. Under this agreement the landlord is responsible for maintenance and upkeep of the property.
- Triple net lease (also known as NNN): Under the triple net lease agreement, the tenant must pay rent and all operating costs, including property taxes, insurance and maintenance expenses.
In your search for office space for your business, it is wise to go in knowing something about leasing agreements, so you know what to expect and have some idea of what your preferred type of lease might be. However, if you are working with a broker, they will be able to help you navigate this aspect of the process and provide advice on which type of agreement might best meet your needs.