Do You Know Your Lease?

by | Dec 1, 2018 | Management 101, News & Updates | 0 comments

At McKenna & Company we take pride in making sure our tenants and/or clients understand what is in their lease. When signing a lease with a new tenant coming into our business park we always try to walk them through the key points they need to be aware of. To help you better understand some of the common terms we will start with the type of leases most typically used in today’s market place.

Gross Lease

A gross lease means that you pay a base rent amount for your space, usually without any additional monthly costs. This type of lease takes into account the “operating expenses” and are usually built into the rate for the first year of the lease. Typically these leases are used when leasing office space, high rise and campus type products, also referred to as a Full Service Gross Lease, meaning all services are included. The year your lease is signed is typically used to establish your base year, so over the term of the lease if there are increases from the base year expenses then the increases are passed back to the tenants based on your proportionate share of space in the overall building or business complex depending on how the landlord has established operational cost allocations.

Modified Gross Lease

Much like the Gross Lease you would have your base rent amount, but a lot of times your utilities are separately metered and you would put those services in your name, along with contracting for janitorial and possibly trash services. The taxes and insurance costs would most likely be factored into the base rent amount for the first year. The year your lease is signed is typically the year used to establish your base year for calculating your operating expense increases. To provide an example if your base year expenses were $1,000.00, and the next billable year the expenses increased to $1,100.00, you would be responsible for your proportionate share of the increase over base or your proportionate share of $100.00. These costs are typically billed once a year, usually in February or March once the final year end financials are complete and you have established your operating costs from the prior year.

Triple Net (sometimes called “Net Net Net or NNN”)

This means that in addition to your base rent, you will pay an additional amount based upon your space’s proportionate share of space in relation to the size of the overall business complex. These leases typically start out with a lower base rent amount. What makes the “triple net” charges are (1) Common Area Maintenance [CAM charges], (2) landlord’s real property tax, and (3) landlord’s insurance. In reality, there may be more than these three items, or fewer, but the same term is used. So to give you an example if your proportionate share is 10%, you would pay in addition to your rent 10% of the combined total of the annual charges for these three expenses. Those additional charges would then be amortized into 12 monthly payments, due along with your base rent. When comparing places to lease, it is important to ask what makes up the triple net charges and what that number is per square foot, so you can compare with other possible spaces and budget accordingly.