The 3 types of commercial lease rates

By Stephen A. Cross, CCIM

Commercial lease rates are quoted as full service, or triple net, or industrial or modified gross.

They vary according to how much of the building’s operating and/or occupancy expenses are included in the base rental rate. Operating expenses typically consist of property taxes, casualty insurance and common-area maintenance costs. Occupancy expenses include utility and janitorial expenses, but not telecommunications costs.

Full service, also known as “gross”: In a full-service lease, typical of Class A and B multi-tenant office and medical properties, the building’s operating and occupancy expenses are included in the base rental rate.

Of note is that this type of lease generally references a base year, generally the first year of the lease term, which establishes the amount of operating/occupancy expenses included in the base rental rate. In subsequent years, tenants pay, as additional rent, a pro-rata share of any increases in the operating/occupancy expenses. Insight: I suggest setting an annual cap on the amount that controllable operating/occupancy expenses can increase, and specify that property management is a controllable expense.

Triple net: Most industrial and retail properties, as well as office and medical buildings that are separately metered, are commonly leased on a triple-net basis, I which the tenant is charged a base rental rate plus a pro-rata share of the operating expenses of the building plus all of its occupancy costs. The term NNN derives its name from the three things that are not included as part of the base rent (i.e., property taxes, casualty insurance and common area maintenance. Insight: The acronym CAM is sometimes used interchangeably with NNN, but these terms are not the same. Therefore, when discussing the total costs of occupancy, tenants are cautioned to confirm the components and amounts of each of the NNN expenses, as well as estimates of typical electrical, water, gas and janitorial costs.

Industrial, or modified, gross: In an industrial, or modified, gross lease, the tenant pays a base rate plus some of the operating expenses, as well as its cost of utilities and janitorial services. When evaluating an industrial/modified gross lease, make certain you clearly understand which operating expenses are included in the base rental rate, which are not and the estimated amounts of each. Insight: Some landlords now add a surcharge for water, sewer and trash to industrial/modified gross leases, which can easily increase the total rental costs by 5 to 15%.

Regardless of the name that the landlord or listing agent/broker uses to describe the lease rate, the challenge that tenants have is to independently confirm which operating and/or occupancy expenses will be assessed in addition to the base rent, and then compare and contrast the out-the-door, all-inclusive prices of competing properties.

Stephen A. Cross, CCIM, owns CROSS Commercial Realty Advisors and advocates exclusively for tenants and buyers. Contact him at 480-998-7998 or steve@crossrealty.com.