The various types of leases, with one exception, are defined primarily by which operating expenses are included in the base rent—in other words, which operating expenses the landlord pays and which operating expenses the user pays.
Given that lease terminology and included expenses vary from market to market, landlord to landlord, and even building to building, it is extremely important for the user to understand exactly which operating expenses will be included as part of the base rent and which operating expenses will be paid in addition to the base rent.
As accounting rules evolve regarding capitalization of lease rents, it will be important for the lessee to know the amount of operating expenses included in the base rent, as operating expenses should not be capitalized. It may be best to bifurcate the operating expenses from the rent to prepare for the likely new accounting rules.
Leases can be viewed on a continuum. At one end is the full-service lease (sometimes referred to as a gross lease), in which all operating expenses are included in the base rent (the landlord pays the operating expenses). Moving in the continuum next is a modified gross lease, in which the user is responsible for paying some of the operating expenses, and the landlord is responsible for paying the balance. On the other end of the continuum is net leases (or triple-net or absolute-net leases), in which the user pays all operating expenses in addition to the base rent.
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Full-Service Lease
These leases typically are used for multi tenant office buildings in which all operating expenses are included as part of the rent. This includes costs such as property taxes, property insurance, repairs, maintenance, management fees, utilities, and janitorial service. An expense stop often is utilized to set a ceiling on expenses paid by the landlord.
Modified Gross Lease
Sometimes called flex or industrial gross, these leases typically are seen in small office, service, warehouse buildings (sometimes called showroom buildings), or R&D (research and development). While similar to full service, a modified gross lease includes fewer operating costs in the base rent. For example, depending on the lease structure, a modified gross lease may include property taxes but not insurance, or vice versa. It’s especially important for the user to understand exactly which operating expenses are included in the base rent and which expenses must be paid in addition to the base rent. As a rule of thumb, if the property is not a multitenant office or industrial building, the user will pay electricity directly to the utility provider and coordinate their own janitorial service. Modified gross leases generally are applicable for single-story buildings with separate electrical meters, enabling the utilities provider to separately meter and directly charge each tenant.
Net Lease
These typically are used for large warehouse or industrial properties, retail buildings, and office properties in some markets. With a net lease, the user pays all operating expenses in addition to the base rent on a pro rata basis. The cost, sometimes referred to as the triple nets, includes property taxes, property insurance, and common area maintenance (CAM). As in the modified gross lease described above, the user typically pays their own utilities (with the possible exception of water) and janitorial directly to the provider.
Percentage Rent Lease
The one exception to the continuum of standard leasing types is a percentage rent lease, which typically is found only in retail leases. Percentage rent leases usually are structured as net leases, but in addition to the triple-net costs such as property taxes, insurance, standard operating expenses, utilities, and janitorial service, the tenant also pays the landlord a predetermined percentage of their retail sales above a defined breakpoint.
Given that lease terminology and included expenses vary from market to market, landlord to landlord, and even building to building, it is extremely important for the user to understand exactly which operating expenses will be included as part of the base rent and which operating expenses will be paid in addition to the base rent.
As accounting rules evolve regarding capitalization of lease rents, it will be important for the lessee to know the amount of operating expenses included in the base rent, as operating expenses should not be capitalized. It may be best to bifurcate the operating expenses from the rent to prepare for the likely new accounting rules.
Leases can be viewed on a continuum. At one end is the full-service lease (sometimes referred to as a gross lease), in which all operating expenses are included in the base rent (the landlord pays the operating expenses). Moving in the continuum next is a modified gross lease, in which the user is responsible for paying some of the operating expenses, and the landlord is responsible for paying the balance. On the other end of the continuum is net leases (or triple-net or absolute-net leases), in which the user pays all operating expenses in addition to the base rent.
____________________________________________________________
Full-Service Lease
These leases typically are used for multi tenant office buildings in which all operating expenses are included as part of the rent. This includes costs such as property taxes, property insurance, repairs, maintenance, management fees, utilities, and janitorial service. An expense stop often is utilized to set a ceiling on expenses paid by the landlord.
Modified Gross Lease
Sometimes called flex or industrial gross, these leases typically are seen in small office, service, warehouse buildings (sometimes called showroom buildings), or R&D (research and development). While similar to full service, a modified gross lease includes fewer operating costs in the base rent. For example, depending on the lease structure, a modified gross lease may include property taxes but not insurance, or vice versa. It’s especially important for the user to understand exactly which operating expenses are included in the base rent and which expenses must be paid in addition to the base rent. As a rule of thumb, if the property is not a multitenant office or industrial building, the user will pay electricity directly to the utility provider and coordinate their own janitorial service. Modified gross leases generally are applicable for single-story buildings with separate electrical meters, enabling the utilities provider to separately meter and directly charge each tenant.
Net Lease
These typically are used for large warehouse or industrial properties, retail buildings, and office properties in some markets. With a net lease, the user pays all operating expenses in addition to the base rent on a pro rata basis. The cost, sometimes referred to as the triple nets, includes property taxes, property insurance, and common area maintenance (CAM). As in the modified gross lease described above, the user typically pays their own utilities (with the possible exception of water) and janitorial directly to the provider.
Percentage Rent Lease
The one exception to the continuum of standard leasing types is a percentage rent lease, which typically is found only in retail leases. Percentage rent leases usually are structured as net leases, but in addition to the triple-net costs such as property taxes, insurance, standard operating expenses, utilities, and janitorial service, the tenant also pays the landlord a predetermined percentage of their retail sales above a defined breakpoint.
COMMERCIAL REAL ESTATE
TRANSPARENCY | CAPITAL PRESERVATION | INCOME STREAM | TAX SHELTER | HEDGE AGAINST INFLATION
VALUE APPRECIATION | PRIDE OF OWNERSHIP
TRANSPARENCY | CAPITAL PRESERVATION | INCOME STREAM | TAX SHELTER | HEDGE AGAINST INFLATION
VALUE APPRECIATION | PRIDE OF OWNERSHIP
