Understanding commercial real estate leases takes careful attention to detail.
The Spectrum of Real Estate Leases
There are two basic types of commercial real estate leases: absolute net leases and absolute gross leases. Everything else falls somewhere in the middle and is determined by negotiations between the landlord and the tenants.
Net leases are common with large single tenant properties such as national restaurant chains. Billion dollar Real Estate Investment Trusts(REITs) have been built by acquiring properties with net leases in place. Absolute net leases, where the tenant pays all expenses related to the property, are commonly referred to as triple net leases. One misconception with the term triple net lease is that it always means all expenses are paid by the tenant. However, this is not always true.
Often times when someone calls a lease triple net, it turn out that it’s actually a modified gross lease and the owner may still be responsible for some expenses. Perhaps there are expense stops in place, or the lease excludes certain expenses. In any case, the important thing to remember is that just because someone calls something a triple net lease does not mean it’s a true absolute net lease.
Absolute gross leases are on the other end of the spectrum and require that the landlord pays all expenses associated with a property. Typically this includes properties taxes, insurance, and maintenance. Gross leases are often called full services leases, however as with triple net leases, when someone calls a lease full service, read the fine print. The devil is always in the details.
Modified Gross Lease
The modified gross lease is a term applied to a lease where the expenses are both the landlord and the tenant’s responsibility. Commonly negotiated expenses include property taxes, property insurance, common area maintenance (CAM), utilities, and structural repairs.
Conceptually, a modified gross lease is pretty simple to understand. It’s a lease that’s somewhere between an absolute net lease (where tenant is responsible for all operating expenses) and an absolute gross lease (where landlord is responsible for all operating expenses).
The important takeaway is to read the lease agreement carefully. Despite the common lease vocabulary that people often use to categorize leases, all lease agreements should be considered to be unique, and as such, read thoroughly.