Navigating commercial real estate listings and finding the best fit for your investment strategies can be quite challenging. Aside from price and cap rates, a key feature to consider is the type of lease that may already be in place on a property (which you’ll inherit as the new property owner). Lease types vary, and the unique details within each deal can differ significantly from one property to another.
As we work to present qualified buyers with the best listings for their portfolios, SIG advises investors on the property’s existing lease terms, which remain in force after the sale. Often, people ask us: “What’s the difference between a gross lease and a modified gross lease? How are they different from a triple net deal?”
A side-by-side comparison of these different lease types can help you best understand them individually and learn how the terms vary across different lease types. So we have prepared comparisons of modified gross lease vs. full service gross lease vs. triple net lease to help you distinguish between these lease types and understand which one best fits your investment criteria.
Overall, it’s essential to understand that commercial real estate leases range from absolute net leases on one extreme to absolute gross leases on the other, and hybrid leases (all others) in the middle. As you approach the absolute gross extreme, the landlord covers most of the operating expenses. In an absolute gross lease, the property owner is responsible for all the operating expenses.
On the other hand, as you draw near the absolute net extreme, the tenant has greater responsibility for paying operating expenses. In an absolute net lease, the tenant covers all the operating costs.
Full Service Gross Lease
A full service gross lease provides tenants with an all-inclusive deal that is covered with their monthly rent payments to the property owner. In a gross lease, the property owner is responsible for all the expenses associated with the property, including:
- Property Taxes
- Maintenance and Repairs
- Property Improvements
The purpose of a gross lease is to simplify tenant expenses by including everything in one agreed-upon rent sum. However, this type of lease also gives property owners the opportunity to cover some, or all, of the property expenses by building those costs into a monthly rent payment from their tenant. In instances where a property has multiple tenants, the costs will be divided amongst the various tenants, based on the size of their office or retail space.
Full-service and gross leases are generally the same, with some investors referring to them as full-service gross leases. these terms refer to leases that are structured with the tenant paying one rental rate (including base rent and operating expenses). The landlord usually takes care of building expenses and services (e.g., property taxes, insurance, and maintenance), which are paid by using rental income. With full-service gross leases, it’s crucial to study the lease closely to make sure that you understand that if the common area maintenance expenses increase, you may have to contribute toward these additional expenses.
Full Gross Service Vs. Modified Gross Lease
The full service gross lease with the property owner is responsible for all of the property’s operating expenses. However, a full service gross lease can also sometimes oblige tenants to pay a portion of the property’s operating costs. A full service gross lease can have several definitions among real estate professionals and in different countries. A lease can be labeled as full service (gross), but still require that the tenant ante up for a certain percentage of operating expenses, so reading the fine print of each lease is essential.
The full gross service lease differs from a triple net lease (NNN). In the NNN lease structure, the tenant covers all of the property’s operating expenses. In contrast, in a full gross service lease the landlord shoulders all of these costs. As a result, the NNN’s net lease rate will typically be less than the lease rate with a full service gross lease. That’s because with a triple net lease the tenants will also be responsible for paying their portion of the property’s overhead to the property owner.
Triple Net (NNN) Lease
A triple net commercial lease, also known as an NNN lease, is an agreement between a property owner and a tenant where the tenant absorbs all the costs and expenses for the property, including:
- Monthly Rental Fees for the Building or Space
- Property Taxes
- Insurance Premiums
- All Maintenance, Upkeep, and Repairs
NNN leases are highly advantageous for investors, who favor this type of commercial lease because it’s a low-touch, low-risk investment that provides solid, predictable returns via monthly rent payments. Triple net leases are typically used in single-tenant business locations such as restaurants, banks, dollar stores, medical clinics, etc.
Triple net real estate can also be beneficial to tenants who want a dedicated location to grow and expand their business, without dabbling in real estate or covering new construction costs to find a prime location. Instead, they bundle all the property expenses as business expenditures to build their business.
Modified Gross Lease
Commercial real estate leases typically calculate rent in two ways, gross and net. The modified gross lease, or modified net lease, combines gross lease and net lease.
In a gross lease, the property owner pays all of the expenses associated with the building in exchange for a monthly, all-inclusive rent payment. In a triple net lease, the tenant absorbs all of the operating expenses and property costs into their own business, in addition to monthly rent payments.
A modified gross lease falls somewhere between a gross lease and a triple net lease. In a modified gross lease, the tenant is responsible for a few (but not all) of the operating expenses of the property (such as unit maintenance and repairs, utilities, and janitorial costs). At the same time, the property owner/landlord pays for the other operating expenses. The tenant still must pay the expenses as part of one monthly rent bill. The terms of modified gross leases are unique to each deal and can vary vastly in how costs and responsibilities are divided between the property owner and the tenant. For example, in a modified gross lease, a tenant may be responsible for all the upkeep and maintenance costs and a specific portion of insurance premiums, while the property owner covers taxes and remaining insurance costs.
The extent of the tenant’s and the property owner’s obligations is detailed in the lease terms. Expenses assigned to the tenant can differ from property to property, so a person who wants to rent a space must read the modified gross lease carefully to know which costs will be their responsibility. For example, a modified gross lease may stipulate that the tenants may have to pay a share of an office building’s heating bills. The lease may also compel tenants to pay for cleaning services and chip in for common area maintenance (CAM). At the same time, the landlord is responsible for real estate taxes and property and building maintenance. Some modified gross leases have an expense stop, meaning the building operating expenses do not change in the lease’s first year, while in subsequent years any rise in these costs will be charged to the tenant.
Because maintenance and other related expenses are covered by the property owner in a modified gross lease, it’s an advantage for the tenant. Thus, the tenant has more power over financial planning for costs directly associated with their business, such as rent, business taxes, employees’ salaries, and so forth and does not have to worry about the building’s day-to-day upkeep. However, if the property owner is slipshod in handling general maintenance, this could be an issue for tenants, especially those who count on the look of their office, restaurant, or store to attract and keep clients.
Unlike in a normal gross lease, costs often ebb and flow in a modified gross. As a result, an expected rise in expenses can be detrimental to a tenant’s finances, especially startups and small businesses. Also, the property owner may overcharge the tenants for operating costs. This may increase the rental rate, and the tenant could pay more than their fair share of the costs.
For landlords, the modified gross lease enables them to maintain their property according to their standards, which is beneficial if some tenants are not steadfast in taking care of repairs or improvements such as maintaining exterior spaces. However, property owners have to be careful when calculating the building’s operating costs. A property owner has to avoid not charging sufficient rent for a property that needs a considerable amount of maintenance.
Modified gross leases are typical in situations such as several tenants in an office building or other stand-alone buildings. In a building with one meter and a monthly electric bill of $2,000, the cost would be divvied up evenly between the tenants. If there are 10 renters, they each pay $200. Also, the bill can be based on the square footage of each’s tenant’s office. Finally, if each tenant has their own meter, each tenant receives a bill based on the amount of electricity they consume. This setup can be advantageous for the tenant and help to save money. When the tenant pays their own utilities, they can take steps to use them more efficiently. In a modified gross lease, the property manager often takes care of the building’s other expenses, such as property taxes and insurance.
Contact Us For Assistance With A Full Service Gross Lease
Sands Investment Group is a unique team of distinguished experts in the net lease space who fully understand even the most subtle distinctions between various types of commercial leases. Our client-focused approach, extensive connections, and marketing expertise are just a few of the reasons we’re the fastest growing net lease investment company in America, closing over 3,000 transactions worth $6 Billion since 2010.
Get in touch with a net lease expert today by calling 844.4.SIG.NNN or sending us an email at info@SIGnnn.com.