Searching for a new space to lease can be overwhelming to a prospective tenant that is not familiar with the process and the nuances that exist in commercial real estate. It is the broker’s job to make the process easier for clients by educating them on the various lease types and the corresponding expenses.
There are numerous factors a tenant must understand and consider when looking for space to lease whether it’s office, retail, medical or industrial space. One factor that is significantly important for comparing one space against another is the type of lease at each property under consideration. The various lease types and the differences between them are often times foreign to prospective tenants, but need to be understood when negotiating a lease. The three most common lease types in Central Oregon are full service gross, modified gross and triple net.
Full service gross leases are the easiest to understand and also the least prevalent. This type of lease requires the landlord to provide and pay for all maintenance and repairs, janitorial services, waste removal, utilities, insurance, taxes, and other operating expenses for the property. In most cases, the only additional costs for a tenant under this lease structure are phone and internet. This type of lease in our market is most common for small executive office suites.
Modified gross leases are similar to full service gross leases, except some of the additional costs associated with leasing space are not included in the rent being quoted. The most common type of modified gross lease in our market consists of a rental rate that excludes the cost of gas, electricity, and janitorial service. Tenants are responsible for contacting the service providers directly to set up accounts. This type of lease can be found with all property types, but is most common in office or industrial buildings, where tenants have differing utility needs.
Triple net leases are the most prevalent in our market, but can also be the most confusing. In a Triple Net lease, the tenant is responsible for the base rent and their proportionate share of property taxes, property insurance and common area maintenance charges (CAMS). The tenant is also responsible for any costs associated with their own occupancy including janitorial services and utility costs. All of the additional costs are lumped together and referred to as triple nets or NNN’s. The NNN’s are typically quoted as a price per square foot expense that is in addition to the base rental rate which often creates confusion. Creating even more confusion is the fact that sometimes utility expenses are included in the NNN’s and sometimes they are not. It is important for a tenant and their broker to fully understand what is and what is not included in the NNN’s so that the space options can be compared on an apples–to-apples basis.
There are numerous types of lease structures that exist, but the three outlined above are the most common in our market. It’s the broker’s job to clearly explain each lease structure and the differences between them in order for the client to make an educated decision regarding the overall cost when choosing a property. It is vitally important for brokers to clearly outline what expenses are and aren’t included on their marketing materials so there is no confusion as to the tenant’s responsibility in the lease.
Jay Lyons, SIOR, CCIM is a partner and broker with Compass Commercial Real Estate Services in Bend, Oregon.