Nov 22, 2011

Net, Gross & Full Service Corporate Real Estate Leases

By Jordan Slater

Corporate Real Estate Lease

Finding the right corporate real estate lease means the best match between landlord and tenant. The three main types of leases are net, gross and full service.

 

 Net Corporate Real Estate Leases

The net lease, or triple net lease, is typically found in properties that stand alone. The tenant pays rent and also the utilities, insurance and taxes for the property and its surrounding areas like parking lots and outdoor storage. The fixed rent is lower due to the increased expense for the tenant.

The upside to this type of lease is that a tenant has full control of the property expense. Tenants that have high usage of things like electricity are better suited to net leases. Another benefit is if, for example, property taxes decrease, the tenant receives the benefit of the decrease, not the landlord. If the fixed rent of a gross lease includes real estate taxes and they decrease, the tenant does not receive the decrease.

It is safer with a triple net lease in a newer building where repairs are minimal or non-existent. A tenant can enjoy the benefit of a lower fixed rent without the worry that major building repairs are on the horizon.

The downside to this type of lease is if there is a major repair or maintenance job, the tenant would be responsible for it. Many net leases have clauses that share the responsibility of this type of situation. For example, if there is a structural problem like the roof begins to leak or the HVAC system fails, the landlord will share part of the expense. It is important to read the terms of the lease carefully to see what expenses the tenant must bear. It is prudent to make structural and internal systems of the property the responsibility of the landlord, at least in part and ideally in whole, which is called a modified net lease.

 

Gross Corporate Real Estate Leases

The gross lease is commonly found in properties with multiple tenants. Each tenant pays a fixed rate rent that is escalated or raised by the landlord at specified intervals. The landlord uses fixed rents to pay expenses of the property, such as taxes, insurance and maintenance. Common area maintenance (CAM) is usually included in gross leases with multiple rental units. Landlords use CAM to maintain the common areas of the property like parking lots, halls and sidewalks. While the tenant would pay for utilities like electricity and in some cases water for their own unit, the landlord pays the utilities that apply to the common areas, such as parking lot lights and water for common bathrooms.

It is easier for a tenant to do budget projections with a gross lease, as payments to the landlord are at a fixed rate. Increases or escalations are in the terms of the lease, so a budget for these expenses is easily forecasted.

 

Full Service Corporate Real Estate Leases

Full service leases are typically found in large multi-unit properties like office buildings. The tenant pays a fixed rent charge that encompasses all the expenses of the tenant's occupancy. The full service rent includes the rent, CAM, insurance and taxes, HVAC, maintenance and trash removal. A full service plus electric is common where the tenant pays rent plus the cost of electric.

Every business must evaluate its needs and choose a property lease that is beneficial in the short and long term. Knowing the differences between these leases is a good first step in determining what type of lease is best, based on its budget and level of responsibility it is willing to take on.

Here are some great Commercial Lease Negotiation articles:

6 Steps to a Successful Commercial Lease Negotiation

3 Tips for Winning Your Commercial Lease Negotiation

Tenant Improvement Negotiation Strategies

 

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Topics: corporate real estate

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Jordan Slater

Jordan Slater