Are you in the market for downtown office space or a suburban office building? If so, you probably are also in the market for a lease.
Leasing commercial office space is a common arrangement between business owners and landlords. Such arrangements are popular because they enable businesses to use more of their capital in their business instead of tying it up in "bricks and mortar" by owning real estate.
Just as there are many different types of office buildings and commercial office space available in the market, there are also many different types of property lease arrangements. Different office buildings or commercial real estate may quote lease rates using different formats, depending on the type of commercial property, the preferences of the property owner, and even the market in which you are located.
It's very important that you and your leasing representative understand the proposed office lease structure when comparing different options. Here are quick descriptions of the major types of leases commonly used for office for rent.
Full Service or Gross Leases
This is the type of lease most often used in multi-tenant office buildings. Under a "Full Service" or "Gross" lease, the office building owner charges the tenant a single monthly lump sum that includes the space for rent plus all building operating expenses: property taxes, insurance, common area maintenance, utilities and janitorial, and other building services. Under some Gross leases, utilities are not included in the rent. Instead the tenant is separately billed for the share of utilities that it uses.
Typically, Full Service and Gross leases come in two types: "flat" or "step." Under a flat lease, the tenant pays the same lump sum for the entire lease term. A step lease includes periodic escalations (or steps) in the base rent at certain defined dates throughout the term of the lease. The escalations are intended to cover expected increases in taxes, insurance, maintenance and other building expenses over the course of the lease. In some cases, the escalations may be tied to cost-of-living measure rather than specific building expenses.
Triple Net Leases
Most industrial and flex buildings as well as some office buildings will offer space under a triple net ("NNN") lease. Instead of a single, lump sum, under a triple net lease the landlord charges a base rent plus an additional amount covering the tenant's share of property taxes, insurance and expenses for common area maintenance. Tenants in industrial or flex buildings may contract for and pay separately for their own janitorial and utilities. In most triple net office leases the tenant's share of maintenance and utilities are passed on to the tenant.
Modified Gross (Mod Gross)
A modified gross lease is a cross between a Triple Net lease and a Gross lease in which some operating expenses may be included in the lease. Under a Modified Gross lease, utilities are usually paid by the tenant. However, some building owners may opt to include utilities in the rent as well if the space cannot easily be tied to a separate meter.
Under a percentage lease, the landlord charges the tenant a base rent and/or a percentage of the tenant's gross revenue generated in that location. This type of lease is most often used for high demand retail locations. In some cases, the landlord may charge a base rent and a percentage of the tenant's gross revenue above a certain level of sales. The key to this type of lease is strictly defining "gross revenue" since certain items are usually deducted from gross sales for the purpose of determining the percentage rent. It is very important for tenants to work closely with their real estate broker or leasing representative to define those items and terms.
Andrew Woods is a well known Real Estate Manager who provides valuable insights on Commercial Property
Trends & Listings. He regularly writes about the various investment opportunities in commercial properties