Before signing a lease agreement it is important to understand the nuances of commercial real estate leases. The three most common types of commercial real estate (CRE) leases are Full Service Gross (FSG), Modified Gross (MG), and Triple Net (NNN). 

The typical NNN Lease will require the Tenant to reimburse the Landlord for all of the operating expenses related to the property. The term “Triple Net” comes from the three types of operating expenses. They include: real estate taxes, insurance, and common area maintenance (outside lighting, water, sewer, trash, landscaping, etc.) So Triple Net is a shorter way of saying:

 “Rent that is NET of taxes, NET of insurance, NET of maintenance”.

This lease type used to be squarely in the domain of retail leasing, but now has become almost ubiquitous across the different property types (office, industrial, retail, special use). Landlords like it because it’s a direct passthrough to the tenant of costs, and tenants like it because it’s transparent, where the tenant has the right to audit and view all of the expenses every year.

The NNN lease also means that a tenant is responsible for 100% of the repairs and maintenance to their space, including mechanical systems like HVAC. Most Landlords will require the Tenant to maintain the HVAC or evaporative coolers, while as a variation, other Landlords will maintain the HVAC and evaporative coolers and bill back the cost of this to the Tenant as a common area maintenance expense. The most important item to note is that the NNNs are not fixed throughout the term of the lease. If the operating expenses increase then the NNN’s go up. Conversely, though rare in this day and age of high inflation, if there was a reduction in costs for some reason, tenants can see their NNNs go down.

The MG lease is similar to a residential lease in which the Landlord pays the operating costs. The subtlety between the MG type lease and a residential lease is that the MG lease has what is referred to as a “base year” operating expense. Every year, as the operating expense presumably increases over the originally defined base year (which is usually the starting year of the lease)  the Tenant is responsible for paying the Landlord the difference. For example: If the base year expenses are $3.60 per foot annually and in year two the expenses increase to $3.62 per foot annually, the Tenant is responsible for the $0.02 per foot increase, paid as “additional rent”. 

There is no free lunch. Essentially, some Landlords will only sign into NNN leases and some Tenants will only sign MG leases. To use a quote from Jim Rohn, American entrepreneur, author and motivational speaker” If you don’t like where you are, move. You are not a tree.”