Commercial Lease Terminology
MULTI-TENANT BUILDINGS
There are many types of leases in multi-tenant buildings. Understanding the complex terminology will play a key factor in valuing lease terms.
Proportionate Share -- of operating expenses are calculated on a square footage basis. Tenant’s Sq. Ft. divided by Total Building Sq. Ft. = Tenant’s proportionate share.
Base Year -- is typically utilized in multi-tenant industrial building leases to determine “base” cost for operating expenses cost of the space. The base operating expense account is the floor over which any increases in operating expenses will be passed on to the tenants of the building. In general, a base year is calculated on a calendar year basis or the first 12 months of Tenant’s occupancy.
Expense Stop
-- is the preferred method for expense calculation by a Landlord. This vehicle allows a Landlord to estimate the approximate expenses the building will incur and the tenant is responsible for payment of their proportionate share of actual operating expenses over the estimated expense stop. This is rarely utilized anymore as it led to fraudulent estimates of expenses in the past and unexpectedly high operating pass-through expenses to the tenants.
Modified Gross Leases
There are numerous types of modified gross leases that are commonly utilized in multi-tenant office buildings. A modified gross lease is similar to a full service gross lease; except that some of the base services are not included by the landlord (taxes, maintenance, insurance and utilities). The most common types of modified gross leases exclude maintenance, janitorial and electrical. This type of lease is commonly utilized in medical office buildings or multi-tenant single floor office buildings, where different tenants have varying needs for electrical or janitorial services. In general, this type of lease requires separately metering individual office suites to determine electrical usage. Generally in a modified gross lease the Landlord has the right to pass-through expenses utilizing a base year.
Full Service Gross Lease
A full service gross lease is where the Landlord is responsible for the payment of taxes, maintenance, insurance and utilities. All of the costs are included in the base rent figure. The tenant is typically responsible for their own property insurance and taxes and any excess utility consumption beyond building standards. Further, Tenant is typically responsible for their proportionate share of any increase in base operating expenses over a base year or expense stop.
Standard Industrial Gross Lease
The industrial modified gross lease is common among multi-tenant industrial buildings. As with a modified gross lease, the landlord will generally pays for the base year property taxes and building insurance. Tenants are generally responsible for their share of common area operating expenses and common area utilities. Services that the Landlord provides differ from lease to lease.
SINGLE-TENANT BUILDINGS
Single tenant office buildings are generally leased on a triple net basis (NNN). This lease calls for the tenant to be responsible for all costs associated with occupancy.
Net Leases
This type of lease is rarely utilized in a multi-tenant office building. As with a modified gross lease, a modified net lease is also available. There are no set standards as to what costs may be excluded in a modified net lease; the lease is usually customized according to need.
Types of Net Leases
Net leases define the responsibilities of the landlord and the tenant differently. The following are types of net leases:
Single Net Lease -- is a net lease where the tenant agrees to pay a monthly lump sum base rent as well as the property taxes. The landlord is responsible for all other operating expenses of the premises.
Double Net Lease (NN) -- is a net lease where the tenant agrees to pay a monthly lump sum base rent as well as the property taxes and the property insurance. The landlord is responsible for all other operating expenses of the premises.
Triple Net Lease (NNN) -- is a net lease where the tenant agrees to pay their proportionate share of property taxes, property insurance, common operating expenses and common area utilities. Tenants are further responsible for all costs associated with their own occupancy including personal property taxes, janitorial services and all utility costs.
If the space is part of a larger building, the common area maintenance charges (CAM) will be divided among the tenants of the building, generally based upon the tenant’s square footage percentage of the overall complex. In general, the landlord will be responsible for the structural integrity of a building.
Absolute Triple Net Lease – commonly referred as a Bond Lease, is a net lease where the tenant agrees to pay a monthly lump sum base rent as well as the property taxes, the property insurance, and the maintenance. Under an absolute triple net lease there are no legal defenses if a tenant fails to meet his responsibilities.
RETAIL ESTABLISHMENTS
The most common lease utilized in the retail industry is the net lease. As with the industrial and office net lease, the retail net can be utilized for either a single tenant or a multi-tenant environment. Most retail centers utilize a net lease where the owner oversees the common area maintenance (CAM) and this expense is divided among the tenants as in any multi-tenant facility.
Percentage Leases
Retail lease can have a provision where as the Landlord will receive a percent of the gross sales of the business after reaching an established dollar volume of the business.
(Several sources were used to compile this summary)
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