Rental Rate Structure
The structure of your lease depends on a few factors. It’s important to understand how your lease is structured and what the basic terminology means when negotiating your agreement. The type of property you are leasing plays a big part in determining the type of lease offered. An industrial property lease will be structured differently than one for a retail property or office space.
There are common (even expected) lease structures used within these sectors and the details can change from deal to deal. The type of lease you enter into will determine your share of property costs above and beyond your basic rent. Each lease is unique and it’s important to be sure you fully understand the basic structure and the details that will affect your bottom line.
Gross & Modified Gross
A Gross lease is less common today than a Modified Gross lease. In a gross lease all operating
expenses are inclusive of the tenant’s base rent amount and paid in full by the Landlord. In the modified version a stipulation is included to protect the Landlord against any major or unexpected expenses incurred by taxes, insurance, and property maintenance. In a modified gross lease, the tenant pays base rent plus an agreed amount toward these expenses after the first year. Typically the agreed amount is in the form of a percentage of the property’s total costs. The percentage is equal to the percentage of the square footage in which the tenant operates. Fifty percent of the building pays fifty percent of the costs.
Net, Double Net, & Triple Net (NNN)
In Net leases, the tenant agrees to pay specific outlined types of operating expenses related to the property. “Net” is a generic term that could mean all the property operating costs are negotiated into the lease, or a portion thereof. Double Net means that two of the main operating expenses will be the responsibility of the tenant. Generally speaking, those are taxes and insurance. And, as you might expect, Triple Net leases add a third expense into the mix, usually the building maintenance.
There are various differences within these fundamental lease structures that are associated with specific types of businesses. For example, a retail property lease may offer reduced rent or costs in exchange for a percentage of sales paid to the Landlord. Everything is negotiable, as they say. It’s to your benefit to discuss options with your Agent or Broker. Learn as much as you can about common expectations of lease terms used within your industry and location. Ensure your Agent or Broker negotiates all of the details into the lease. Don’t assume anything. Ask questions. This is where their expertise will benefit you the most.
Ryan J. Hartsell, SIOR, MRE, Principal, and Managing Partner of Oxford Partners LLC, focuses on reducing the cost and risk associated with leasing and purchasing office and industrial property. He is recognized by his clients for his attentiveness, market knowledge, and negotiation prowess. He holds a master’s degree in commercial real estate and a bachelor’s degree in finance. As a third generation Houstonian and Principal of Oxford Partners, he has a unique appreciation for the business owners’ challenges by way of his own personal experience, which translates into better representation and empathy for his clients.