The commercial real estate sector, just like any other industry, makes use of several proprietor terms. This is because several things are involved in the process, which makes it challenging to cope up.
Thus, you will find some short names or tags given to a specific section or step. For instance, you will come across various phases like full service or triple net when looking for commercial lease space.
They are a common term used by a broker or a landlord who explains the type of lease they are using. But the question is, what do they mean, or why are there specific structures utilized in place of the others?
To reduce all the hassle, let’s move ahead with what people net NNN, modified gross MG, and full-service cross FSG mean, and what is the difference between them?
Triple Net Lease- NNN
The triple net lease is commonly used in standalone and retail properties. However, with all the advancements, the triple net lease has made its way into the office and industrial segment. The NNN here means three net in a lease which includes.
- Common area maintenance
- Business insurance
- Property taxes
In this specific lease, the tenants are the ones who pay a proportionate share of the charges along with the basic rent maintenance and utilities within the premises.
Why is NNN widely used?
Generally, people question why tenants would agree with the triple net lease and all the responsibilities associated with the expenses? This happens because the setup is more beneficial to the tenants than the landlords.
The landlords prefer this way because any increase in the property taxes, common area maintenance, building insurance, etc., are paid by the tenant.
While the tenants on the other side prefer this arrangement because they understand you will utilize the additional amount they are paying for maintaining the common area to its best.
The landlords do not make any income to the pass-through fees, while the tenants choose to audit annually. This guarantees they won’t cut down the maintenance cost for the property. In the retail business, it is the image which helps bring customer to the store. Thus, it is essential to ensure the property is well-groomed.
Full-Service Gross Lease- FSG
They are the most common and preferred lease type you will find in office buildings. However, now they are also common in industrial and lower quality retail centers. The popularity is because of the simple operations of the lease. Thus, it is often used by the unsophisticated landlords on various property types like
- Common area maintenance, insurance taxes
- Utilities
- Janitorial
The landlords prefer to hire a property management company responsible for everything that requires proper maintenance, including timely change of light bulbs in the property. The payment under the agreement may be quoted as $30 per square foot full service.
Why FSG leases are a preferable choice?
The demand for FSG leases is because of the easy-to-understand and straightforward process. The tenants are responsible for all the maintenance and expenses that come with proper management and operations of the property.
But the question here is why tenants will agree to pay for the maintenance? In this scenario, there is a chance the landlord can make money from cut ends as here he is responsible for handling repairs, maintenance, and restocking supplies.
But unfortunately, the landlord cannot benefit from such situations, or else it becomes why the buildings fall into despair. Thus, the tenants agree to pay for the maintenance cost to guarantee the building is well maintained and the business continues running without any issue.
Modified Gross Lease-MG
It is a hybrid type of full-service and triple net lease structure. There is no specific guide or mention of whom the responsibilities fall on the tenant or the landlord. It varies depending upon the sophistication of the landlord, the property style, the business type, and other factors.
As a mix of both FSG and NNN, the modified gross lease can pass several responsibilities and expenses to either party.
- The landlords can choose to pay the taxes while the tenants in the building have to pay for insurance, CAM, utilities, and more.
- The landlord may decide to pay for everything except the utilities
- The landlord may decide to include utilities in the rent but not CAM.
This means there is no limitation as to how this lease setup will work. The rent received through a gross lease is quoted as $30 square foot plus CAM share of the tenant.
Why are MG leases preferred?
This type of lease offers excellent flexibility to both parties during negotiations. Also, it makes things easier for the landlord to set up the lease payment depending upon the way the property was constructed or set before the tenant moved in.
In most cases, the landlords cover the more controllable cost like insurance, while the other uncontrollable expenses like utilities are passed on to the tenant. This lease is a preferable choice for numerous real estates as they are a good compromise for both parties depending upon the scenario.
Which Lease structure should you choose for your property?
In general, one cannot answer the question with accuracy. This is because the needs and applications of every part vary. The best way to answer the question is to consider each lender’s specific case, which will vary based on several factors and attributes.
As with all three-lease structure comes pros and cons for both the tenants and the landlords. The market helps decide which is the best course of action. Suppose all the available lease options are modified gross.
In that case, there will be a challenge to institute a triple net lease unless all the expenses associated with the property come around the same price.
This shows choosing the right type of lease agreement is difficult. Thus, it will be advantageous for you if you consult your commercial broker, CPA, and real estate attorney before you decide the right course of action for your property.
Professional assistance will guarantee you make the right decisions in your and the property’s favor during this time. Also, it will reduce your workload and expenses by assuring the responsibilities are distributed among both parties.
Thus, instead of deciding on your own, seek professional guidance to guarantee you do not end up creating trouble by choosing the wrong course of action.
Take professional assistance for adequate results.
There are several challenges and issues associated with choosing the right type of lease for the property. One needs to consider several factors to guarantee they make the right decision. Thus, it will be beneficial if you consider taking professional help.
Private Capital Investors is a reputable commercial real estate company who can guide and assist you in choosing the best course of action for your specific requirement.
The professionals will help you understand all the leases’ pros and cons to guarantee you decide that is your favorite. So please do not wait and contact the company to take their professional assistance.
