Basic Types of Commercial Leases

Posted by: encon commercial real estate services | August 7th, 2016

When it comes to commercial space, we find ourselves trying to understand the language of leasing and our responsibilities under our lease. Although it is not a daily ritual to review our lease, it is worth setting aside some time to understand the basic definitions of the agreement. The landlords and the brokers refer to leasing in three basic terms: Full Service Gross (FSG), Modified Gross (MG), and Triple Net (NNN). The more you familiarize yourself with these three basic terms, the more you will understand your future obligations under your lease and you will be better informed to negotiate in the future.

In the commercial real estate market, the landlords draft the leasing contract with terms and conditions that are to their advantage. Therefore, the tenant should make sure to know the terms and conditions since they will be bound to the lease after they sign. In addition, it is paramount to have your attorney and tax accountant review your lease prior to signing. With this being said, you have a choice to the type of lease you would like to enter into: Full Service Gross, Modified Gross, or Triple Net.

Full Service Gross (FSG): Tenants pay the rent and landlord pays the taxes, maintenance, and the insurance on the building, as well as the electricity. However, tenants may be responsible for any yearly increases in these costs over the first year (or base year) of the lease.

Modified Gross (MG): Tenants pay the rent and the landlord pays some of the expenses for the building. Tenants are also responsible for some, if not all, of the utilities. We recommend the tenant confirm which utilities they will be responsible for prior to signing the lease.

Triple Net (NNN): Tenants pay the rent plus the expenses of the building (property taxes, maintenance and insurance), which is usually calculated as a separate fee paid to the landlord by the tenant.

A Full Service Gross lease is generally the highest rate per square foot, with Modified Gross being the second highest, and Triple Net as the lowest (at least on paper). While the Modified Gross and Triple Net may seem enticing at first, it is important to keep in mind that they have extra fees and costs associated with these types of leases. Therefore, when comparing between the three terms, compare them based on the total cost. One caveat worth mentioning is the ambiguous Common Area Maintenance (CAM) charge, which represents the cost of maintaining the exterior of the property, and it is often an additional charge due to the landlord. With any type of lease, we recommend you to request a breakdown of these additional charges prior to signing.

While these terms may vary slightly for different markets and landlords, the general concept remains true for each type of lease. The devil is in the details, and we highly recommend that you read your lease carefully to understand your economic responsibility throughout lease term.

John Scatoloni is not an attorney or an accountant and this article is not intended to provide any legal or tax related advice.