Unlike residential real estate where contracts and forms come in templates that are, for the most part, fill-in-the-blank with little room for modification, it seems that no 2 commercial real estate leases (or contracts) are the same. They typically contain many of the same provisions but vary from landlord to landlord (or better said, attorney to attorney). That being said, there are 2 basic types of commercial leases that are organized around the rental structure or calculation method: “net” and “gross.” In this series I will go through the “Who,” “Why,” and “What” of these 2 rental structures/commercial leases; explaining who typically uses which, why they use that particular rent calculation method, and what you can expect from each. I will also touch on the “third” type of commercial lease/rental structure, which is a combination of the two.
Net Leases
For the purposes of this article, the “net” lease/rental structure discussed will be the most common: the triple net lease. In triple net leases, tenants are charged a rental rate and then are charged for each “net:” common area maintenance (CAM)/operating expenses, real estate taxes, and insurance. Tenants are also responsible for paying utilities and janitorial services for their space separately. While there are subtle yet significant differences between net and gross leases, at the end of the day the tenant is paying for the same costs: rent plus costs of ownership. For example, a triple net rental rate of $10 per square foot with costs of $5 per square foot and utilities of $2 per square foot would simply be quoted as $17 per square foot, full-service. Triple net leases are more landlord-friendly than full-service leases. Tenants are responsible for their own space and the landlord essentially just collects their rent check.
Who?
Triple net leases are typical of industrial, flex, and retail space.
Why?
Industrial tenants’ businesses and uses of the space can vary significantly. Granite fabricators require significantly more water than say a logistics company who is essentially using the space for storage. As a result, it makes sense to charge each tenant individually. Flex space is a combination of office and warehouse with proportions of each varying from tenant to tenant. Again, due to this variability, it makes more sense for landlords to submeter usage. Retail space follows the same logic.
What?
Expenses/nets are charged to tenants in the same way as in full-service leases: by proportionate share of the tenant’s space to the overall building/project. Because most property types associated with triple net leases do not typically have internal common areas each tenant is responsible for the systems serving their space, i.e. HVAC units. Tenants oftentimes are responsible not only for maintenance and repair of such systems but in some cases replacement as well. Tenants are responsible for cleaning and maintaining their own space. Triple net charges can vary from year to year, which can make forecasting expenses difficult. Therefore, when negotiating lease terms tenants should try and cap controllable expenses. One benefit to triple net rental structures is that tenants may benefit from any decreases in costs, unlike their full-service counterparts.