Lease Types Defined

*The list below provides general information about lease types but is not a comprehensive list. Other parameters and guidelines with relation to tenant costs versus landlord costs are subject to points outlined in the individual lease.

Triple Net (NNN): A lease requiring the tenant to pay in addition to a fixed rental, the expenses of the property leases, such as taxes, insurance, maintenance, utilities, cleaning, etc. The terms "net net", "net net net", "triple net", and other such repetitions are used.

Full Service (FLSV): A lease in which the stated rent includes the operating expenses and taxes for the building. Same as a Gross lease. Opposite of Net Lease.

Full Service Except Janitorial (FLSVEJ or FSEJ): A lease in which the stated rent includes the operating expenses and taxes for the building but excludes janitorial. Same as a Gross lease. Opposite of Net Lease.

Gross: A lease in which the stated rent includes the operating expenses and taxes for the building. Same as a Full Service lease. Opposite of Net Lease. This is the least common lease type.

Modified Gross (Mod Gross): A modified gross lease sits somewhere between a Triple Net lease and a Gross lease. Some expenses may be included in the lease. Utilities are most likely paid by the tenant, however, utilities can be combined depending how a building and its utility meters are demised.

Lease vs. Buy

The Question:

The question is being asked more than ever before: should my business lease space or purchase our own building? This is not an easy choice as there is no simple answer. The truth is there are advantages and disadvantages to both and a number of factors must be weighed while making this decision. Listed below are the primary factors that should be taken into account while making this important decision.

Lease:

Buy:

Rental Rate Calculations

*Below is a simplified summary of rental rates and calculating the monthly cost of a space. Other factors such as tenant improvement costs, free rent, abated rent and amortization schedules determine the effective monthly rent.

Rental rates are also called "Asking Rents" or "Lease Rates."

Industrial Rental Rates:

Industrial properties are quoted differently than Retail and Office. Industrial space is quoted on a per square foot, per month basis. Also, Industrial spaces typically have two components: a portion of the space that is called "warehouse" and another portion that is "office." Each portion of the space is calculated at a different rate.

Calculation: (Whse SF * Whse Rate) + (Off SF * Off Rate) = Monthly Rent

Example:

   Unit A is 10,000 SF total.

   9,000 SF is Warehouse (whse) at $0.45/SF per month: 9000 * 0.45 = $4050/mo
   1,000 SF is Office space (off) at $0.90/SF per month: 1000 * 0.90 = $900/mo
   ———————————————————————————————————————————
   10,000 SF Total. The combined rate is called the "Blended Rate": $4,950/mo

Office and Retail Rental Rates:

Rates for Office and Retail space are quoted on a per square foot/per year basis.

Calculation: (SF * Rate)/12 months = Monthly Rent

Example:

   Unit A is 2,000 SF at $15.00/SF per year: (2000 * 15)/12 = $2,500/mo

Who pays the broker's commission?

In simple terms, commissions are paid based on the representation of the two parties in the lease transaction. A short summary is listed below:

1. After a lease is signed, the landlord (owner of the property) pays a commission to the Listing Agent (or Landlord Rep) and the Tenant Rep.

2. Typically the commission ranges between 4% and 6% of the value of the transaction (also called total consideration) with 1/2 going to each side of the representation.

3. In terms of tenant rep situations, a tenant doesn't pay a commission to their rep - it is paid by the owner at the time the lease is executed.

Of course there are other factors to consider:

1. One of the most common pitfalls a tenant encounters is touring properties without hiring a tenant representative.    

The reason this is so important is that in most cases, all an agent has to do is to bring the tenant to a property and he/she is legally entitled to a portion of the leasing commission as the "procuring" broker. A tenant may never see the agent again, but since that agent showed them the property, that agent will be paid a commission. These situations can get even more complicated when, later on, a tenant hires a tenant rep different from the initial agent who showed them the property and a commission dispute ensues. It is best to set this up properly from the beginning.

2. Commercial real estate commissions are, in most cases, calculated as a percentage of the rent due under the lease. The higher the rent and longer the term, the more commission is paid. How do agents get paid?

Commercial Real estate agents are typically paid a commission when a signed lease has been executed. The commission is paid by the Owner (or Landlord) of the building and is generally paid one-half upon lease execution and one-half upon tenant occupancy. The commission is most often calculated as a percentage of the lease value (or total consideration). The range is usually between 4% and 6%.

Example:

   A tenant signs a 3-year lease for 2,000 square feet at $20 per SF per year.
   Total Consideration = $120,000 (2,000 SF * $20/SF per year * 3 years)
   Property Owner is paying a 6% commission (1/2 to Landlord Rep, 1/2 to Tenant Rep)    —————————————————————————————————————————————
   Total Commission = $7,200 ($120,000 * 0.06)

To further complicate matters, the commission is first paid to the agent's Broker. The Broker then pays a portion of the commission to the agent, known as the split. Commission splits range anywhere from 50/50 (most common) to 90/10 in favor of the agent. If there is a tenant rep involved, the Broker would then pay half of the total commission to the tenant's rep and a split of the commission to the listing agent.