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Understanding Lease Rates

By April 12, 2012 No Comments

There are three main types of lease rates:  Triple Net (NNN), Modified Gross (MG), and Full Service Gross (FSG).  Some landlords might offer their space differently, but the majority follow the three main types listed above.  The type used will also vary depending on the type of property one is interested in.  This can be confusing and overwhelming when one is trying to find space to lease.  My goal is to break it down so that it is a bit easier to understand.

 

Most retail, flex or industrial buildings and a few office buildings use the NNN lease rate.  This means that in addition to your quoted lease rate you also pay utilities, janitorial service, taxes, insurance and common area maintenance expenses.  At the beginning of the year the landlord will give you an estimated number for the taxes, insurance, and common area maintenance (snow removal, parking lot lights, etc).  These three expenses will be paid monthly based on the estimated number.   The utilities and janitorial services are set-up by the tenant individually as needed.  Sometimes you will find a property that includes water or some other utility in the NNN expenses.  This means that the property is not separately metered and therefore allocated through the NNN expenses.  This can be a good thing if you are a tenant the uses a larger amount of that particular service or it can also be a bad thing – it all depends on what type of tenant you are and the other tenants in the property.

 

A Full Service Gross (FSG) lease type is mainly used for office buildings.  This means that in the quoted lease rate, all utilities, janitorial services, taxes, insurance, and common area maintenance are INCLUDED.  A “base year for operating expenses” is typically seen in a Full Service Gross lease.   This means that the tenant will pay for any increases seen annually in the operating expenses from the initial year the lease was signed, so the monthly rent can increase.  The spaces leased are not separately metered and typically have “common” restrooms, hallways, and staircases.

 

A Modified Gross (MG) lease type is used when the landlord is including everything in the quoted lease rate except for utilities.  This is sometimes seen in a mixed use property or in a property that is separately metered.

 

It is very important to understand the type of lease you are signing and what is or is not included in the rent in order to compare property options.  Lease rates are negotiable, but expenses are typically fixed.  It is in the landlord’s best interest to keep any and all expenses down to stay competitive in the market place.  Your real estate broker can get a breakdown of all expenses and create a comparative chart to help choose the right location.  With all the facts to compare properties, one can find the right location for years to come.