Brian Johnson: Breaking Down the Types of Commercial Leases | Business
So you’ve found the perfect location for your business and it’s time to negotiate the lease. In addition to the basics such as term and rent, what should a tenant (tenant) consider in his commercial lease?
There are three main types of commercial leases. Depending on which one the owner (landlord) wants to use, you determine what tasks you have as a tenant. Who pays the property taxes? Who is maintaining the air conditioning? Who is responsible for the supply?
This is not a small cost and depending on the lease you use, it can make all the difference to the success of your business. There are three main types of commercial leases. Triple Net (NNN), Modified Gross (MG) and Full Service Gross (FSG).
A triple net lease (NNN) means that in addition to paying your basic rent, you are responsible for your proportionate share of property taxes, insurance and overhead costs for the property. The fees are not limited to these three items, they are the big ones and hence it is known as the triple net lease.
There is very little that the lessor does not pass on to the lessee, and these types of leases are preferred by lessors and are typically used for investment property.
In the case of a full-service gross lease, the rent paid by the tenant includes everything, including ancillary costs. These leases are the simplest when a lessee understands their responsibilities. You pay a single amount and the landlord pays for everything.
Often times, these types of leases have a cost freeze or cap at which a lessee can be held responsible if the cost exceeds a certain level. This type of lease is most popular with lessees for obvious reasons.
Modified gross leases are a middle ground between NNN leases and FSG leases. With an MG lease, the tenant is responsible for paying rent and ancillary costs and, depending on the lease, some of the overhead costs. In some leases, the tenant is responsible for any cost increases after the first year.
This type of leasing is very flexible in the handling of cost responsibility and can therefore be a good compromise for the lessor and the lessee.
These descriptions are not absolute, and often lessors and lessees can negotiate terms that modify them to work in a particular situation. That is why it is important that you have an experienced commercial real estate agent working for you in your negotiations. They see dozens of rental agreements every year and can help negotiate the best terms for your agreement.
Brian Johnson is the new President of the Santa Barbara Association of Realtors. He is a California Licensed Real Estate Agent and General Manager of Radius Commercial Real Estate. Brian handles all types of commercial real estate transactions, but has a particular focus on multi-family investments. He can be reached at 805.879.9631 or [email protected]