I have been leasing industrial buildings for almost 29 years, and some things never go away. The confusion of who is responsible for paying operating expenses in leased space is one of these “things.” This issue is addressed in the lease which sets forth the tenant/landlord responsibilities. The number and types of leases out there almost equal the number of landlords. This can all be a little confusing when negotiating lease terms. I would definitely recommend you work with a qualified real estate broker and an attorney before entering into a lease agreement. Listed below are the most commonly used industrial real estate leases:
NNN (Triple Net) Lease
In a true NNN lease, the tenant has all of the same responsibilities as if they owned the building. They are responsible for all operating expenses associated with the property. These expenses include, but not be limited to, maintenance, repair and replacement of the roof, structure, exterior walls, foundations, HVAC, mechanicals and parking lots/truck courts. The tenant would also be responsible for paying the real estate taxes, insurance and common area maintenance (CAM) which includes lawn mowing, landscaping, snow removal, etc.
The total building operating expenses are estimated on a yearly basis. The tenant will then pay as additional rent, 1/12 of its pro rata share of the expenses on a monthly basis. This amount will be reconciled with actual expenses at the end of the year.
In a Net lease, the landlord typically pays for the replacement and major repairs of the HVAC, mechanicals, roof, structure, exterior walls and foundations. The landlord will deliver the HVAC and Mechanicals in good working order. The tenant will be responsible for paying their proportionate share of the real estate taxes, property insurance and CAM (including minor repairs to the mechanicals and HVAC Systems). The responsibilities of paving the parking lot/truck court expenses are more of a mixed bag in this type of lease. The expenses will be paid the same as in the NNN lease section.
In a Gross lease, the landlord typically pays for the real estate taxes, property insurance, CAM and all expenses associated with the roof, structure, exterior walls and foundation. The parking lot/truck court responsibility is a mixed bag here as well. Once again, the landlord will deliver the HVAC and Mechanicals in good working order with the tenant being responsible for minor repairs. Tenants like this type of lease, because it lets them know what their monthly rent will be with no surprises.
Modified Gross leases are similar to Gross leases with a few variations, such as the following examples: 1) the landlord will make the tenant pay increases in operating expenses over the base/first year of the lease; 2) the landlord passes along other expenses such as the HVAC repair and replacement and 3) the landlord makes the tenant pay for the some parts of the CAM and/or property insurance. There are any number of variations that can cause a lease to be classified as Modified Gross.
Full Service Gross
A Full Service Gross lease entails the landlord paying for everything including utilities. These are typically used when someone has extra space within their building or for short term leases. Landlords/owners are typically unwilling to build a demising wall and separate utilities for a short term lease or if they anticipate needing the space back in the future.
Do you still have questions about the different lease types? Gives us a call and we can answer any questions you may have.