Know your Leases – NNN vs. Gross vs. Full Service
Historically triple net leases (“NNN”) have been the standard lease for most retail centers and some medical building as well. With some exceptions, typically “gross” and “full service” leases reserved for industrial and office. With the mixed market conditions these standards vary more often today and a general review of the lease types and variables of each follows:
Triple Net or NNN leases typically have a base rent price with the tenant paying their proportionate share of operational expenses such as property taxes (“N”), insurance (“N”) and common area maintenance (“N”) on top of that base rental amount i.e. $1.00/SF NNN = $1.00 + .50 for property taxes, .20 for insurance and .10 for common area maintenance (NNN charges also known as “CAMs”) total paid by tenant $1.80/sf. This is technically known as a “double net” as it does not include expense items such as management and reserves if the lease included all expenses paid by the tenant that would be considered an “Absolute Net Lease”. An “Absolute Net” lease can include all expenses including management and reserves as part of the tenants lease payment.
Gross also known as “Modified Gross” leases will typically apply to some office and industrial projects. A Gross lease rate will include “base year” taxes, insurance and CAMs in the lease rate. However any increases after the first year “Base Year” may be passed through to the tenant based on a prorate basis in future years.
Full Service leases, most common in Class A office projects, will typically include taxes, insurance, CAMS, management, utilities and janitorial all in one base rental rate. This is very common in multitenant office buildings. Increases in operational expenses may be passed on to the tenant on a prorata basis after the Base Year.
Increase operational expenses, passed through to the tenant after the Base Year are known as “Pass Throughs”. This is over and above any set annual increases that may be in your lease. So be sure to note any sections of the lease that reference these possible Pass through Expenses.
Whether you’re a tenant, landlord, lender or appraiser, it is important to actually read your leases and understand the sections and paragraphs that apply to you. Ignorance may be bliss but in this case your “bliss” could be expensive.
Source: Tiner Commercial Feed