The world of commercial real estate is full of industry jargon. Property listings, lease agreements, and conversations around the negotiating table can all feature niche terms and unheard-of acronyms. It can get confusing fast. Learning the lingo can help you feel confident you’re making the right decisions for your bottom line and help you hold your own during negotiations.
If this is your first time leasing a property, you may be confused about the different lease structures individual property owners are offering. Let’s dive deeper into the three most common structures and what they mean for you.
Triple Net (NNN)
In triple net leases, the tenant pays for rent and their portion of the property’s operating expenses (utilities, taxes, insurance, and maintenance). While this may seem like a lot of added cost for the tenants, NNN leases tend to have lower rents because the tenant is taking on the financial responsibilities for the property that would otherwise be handled by the landlord in alternative lease structures. Plus, there can be some surprising perks for the tenants as well.
Tenants benefit from NNN leases because itemizing each component of the commercial space’s care provides greater overall transparency. Most likely, the landlord will generate a profit from whatever you pay in rent. But the additional fees a tenant pays for operating expenses are typically handed down at cost, meaning tenants don’t overpay for their portion of the operating expenses. In addition, this transparency helps ensure that landlords hold up their end of the bargain. For example, since tenants know the specific percentage that they pay towards the building’s common maintenance, the landlord is incentivized to make sure the building remains properly maintained and cared for.
Landlords benefit from NNN leases because they help account for fluctuations in insurance, maintenance, and utility costs. If there is a sudden increase in the cost of property insurance, that increased cost can easily be passed down to the tenants, reducing the overall loss for the property owner.
Modified-Gross Lease (MG)
A modified-gross lease means that the landlord and tenant share the property’s operational costs. This can be broken down into many combinations:
- Base rental rate plus utilities
- Base rental rate plus utilities and insurance
- Base rental rate plus utilities, taxes, and insurance
And so on.
MG leases can benefit tenants because they provide a lot of flexibility. Tenants may have the option to negotiate which operational costs are shared during the initial lease agreement. While there will be some variability in whatever operational fees are expected, overall, they are simpler to navigate than NNN leases while still maintaining some transparency.
Landlords can also benefit from the flexibility of MG leases. They can choose to take on the financial responsibility of relatively fixed costs, such as insurance, while passing on variable costs, like utilities, onto the tenant. Overall, both parties tend to benefit from MG leases, making them one of the most popular lease structures.
Confused? We can help.
We know when it comes to choosing a property and lease agreement that’s right for you, there are a lot of factors to consider. At NAI, our experienced brokers can help you evaluate your needs, find listings that match your criteria, weigh your options and negotiate the best deal for you. Contact our team today to find out more about how we can help you with your commercial real estate needs.