How to Calculate Lease Rates – NNN – Full-Service Gross – Modified Gross

navpoint  /   January 17, 2013

There are three main types of lease rates, but a landlord’s interpretation of these different types can vary.  This is a basic overview of each of these types:

 

NNN – Triple Net –This type of lease rate includes the base rental rate plus the three N’s.  One “N” stands for property taxes, one  for property insurance, and the final “N” stands for common area maintenance (CAMs).  Triple Nets are often wrongfully referred to as “CAMs” but technically CAM is just one portion of the triple nets, and insurance and property taxes are the other portions.  Common Area Maintenance (CAMs) typically include items such as but not limited to: the parking lot lights, landscaping, snow removal- which amount fluctuates year to year, and all other maintenance/repair of common areas (hallways, restrooms, etc.), sometimes also including a property management fee.  These charges are lumped together to provide one estimated rate for that year.  After year end the actual expenses are reconciled and tenants are either billed for or credited the difference between estimated and actual expenses for the year.  This type of lease rate is advertised as:

Lease Rate: $20.00 /SF  NNN (Estimated NNN = $3.25/SF), meaning the base rental rate is $20.00 per square foot per year and the property expenses, which include property taxes and insurance, are estimated to be $3.25 per square foot per year, though they can fluctuate from year to year.

This means that if you are leasing a space that is 1,200 SF then the base rent per month will be $2,000.00 per month (calculated as 1,200 square feet x $20.00 divided by 12 months in the year = $2,000), plus $325.00 per month for taxes, insurance, and common area maintenance (CAMs), for a total monthly lease rate of $2,325.00.

In retail properties such as shopping centers, water can sometimes be included in CAM, but typically tenants pay gas and electric directly to the providers.

The intent of a triple net lease is that the base rent provides the Landlord with a net return over and above all property taxes, property insurance, and common area maintenance for the property.

 

FSG – Full-Service Gross –This type of lease rate has all expenses included in the lease rate.  Therefore, the lease rate includes base rent, property taxes, property insurance, common area maintenance costs, and typically utilities.  This type of lease rate is advertised as:

Lease Rate: $20.00/SF/YR FSG

This means that if you are leasing a space that is 1,200 SF then the gross rent per month will be $2,000.00.

 

MG – Modified Gross –This type of lease rate is treated similarly to the Full-Service Gross lease for the first full year of the lease term, but slightly differs for the remainder of the lease term. A Modified Gross lease utilizes what is referred to as a Base Year Expense Stop to account for and protect the Landlord from increases in property taxes, property insurance, and common area maintenance costs in future years of the lease term.  The Base Year Expense Stop is the actual total expenses for the property (property tax, property insurance, and CAM costs) for the full year in which the lease commences. A tenant with a base year expense stop is responsible for paying its proportionate share of increases in property expenses over and above the Base Year Expense Stop. This type of lease rate is advertised as:

Lease rate: $20.00/SF/YR MG

This means that if you are leasing a space that is 1,200 SF then the rent per month will be $2,000.00 for the first full year of the lease term. For future years in the lease term, the rent per month will be $2,000.00 plus any expenses over the base year expense stop, if any. For example:

If a tenant signs a modified gross lease for 1,200 SF in January 2021, then the tenant’s base year expense stop is equal to the actual total property expenses (property tax, property insurance, and CAM) for the calendar year 2021. Let’s say the property expenses in 2021 for a property that is 4,800 square feet are $10.00/SF or $48,000.00 total. This Tenant would have a 2021 Base Year Expense Stop of $10.00/SF.  Now let’s assume the 2022 actual property expenses are $10.20/SF or $48,960.00. This Tenant would be responsible for its share of the $0.20/SF increase in property expenses for the year 2022. Because the Tenant occupies 25% of the building, the Tenant would be required to pay an additional $240.00 per year or $20.00 per month.

This process would continue for the remaining years in the lease term, with no change to the base year expense stop. If the actual property expenses in future years of the lease term are less than the base year expense stop, then it is Landlord’s decision on whether they offer a credit to the tenant or not.

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