Understanding the lease structure and difference between NNN leases and full-service gross leases is important if you’ve been looking for a new space for your business or are looking to broaden your portfolio with commercial real estate.
Most tenants can expect to pay some variation of a net lease or gross lease for most commercial properties. This article will cover two main lease structures you can expect to encounter. In addition, we will cover some general components of commercial real estate.
So what is the difference? Essentially, the difference boils down to which party (or parties) covers the maintenance, taxes, and insurance. This differentiation significantly impacts how high or low rent payments can be for tenants. This has the opportunity to draw in or dissuade new tenants. For tenants, common spaces matter when deciding on commercial property.
Commercial real estate is a property used for business-related purposes or to provide workspaces instead of living spaces. Initially, this definition can be somewhat misleading since commercial real estate covers four main areas: office space, industrial space, multi-family rentals, and retail spaces. The most common examples of commercial real estate are warehouses, office buildings, hotels, and apartment buildings.
According to a page from First National Realty Partners (FNRP), In 2020, CRE accounted for $396.4 billion in personal earnings and supported a total of 9.2 million jobs. There is enormous potential for profits and for diversifying your portfolio. But, you do not have to bear the burden of investment and management alone.
In a REIT or a real estate investment trust, investors can pay into a mutual fund in which a company or manager will invest on your behalf in commercial real estate. For those who prefer a hands-off approach, this can be appealing. In this scenario, the investor receives dividends in addition to not needing to manage the property.
Special Offer from our Sponsored Link Above
In a NNN lease, also known as a triple net lease, a percentage of insurance, maintenance, and property taxes are divided amongst the tenants. Often times this is referred to as additional rent in the lease. In most cases, the percentage of these expenses each tenant must pay is in relation to the square footage they occupy. Then, at the end of the year, the owner/landlord would be required to complete a common area maintenance reconciliation for their tenants.
For clarification, if you were to lease a space for a single storefront, like a bank branch, then the branch would be responsible for all expenses associated with the property. In a more traditional setting, like an office building, smaller office spaces would pay less of a share of the total expenses than a larger office would. This is known as pro-rata percentage.
What is a Full-Service Gross Lease?
For full-service gross leases, rent payments for the tenant are usually much higher than those in NNN leases. This is because the tenant has no responsibility for any percentage of the building’s maintenance. For the landlord, the burden of covering the building’s expenses and maintenance falls solely on them. There are no fluctuations in rent prices per month in this leasing model. However, this rate is subject to change at the end of each lease.
Generally, this leasing model is much more expensive for the tenant. It’s more expensive since there is no way to know how many monthly expenses there will be. The landlord has to cover all costs, so in return, they have to collect more. For the landlord, even though you can charge more rent, you are still susceptible to fluctuations in costs or emergency expenses. The landlord bears all the risk for expenses.
Each model has its positives and negatives, but neither model is better than the other. As a landlord, both models have benefits depending on the level of effort you wish to put into your investment. Full-Service gross leases require a bit more management for the landlord since the upkeep of the property relies upon them. While this is not a major drawback, this is not ideal for investors looking for more “passive” income.
In the case of triple net leases, these are common with freestanding properties like banks, quick service restaurants, or coffee shops. But NNN leases are also common in shopping centers and industrial spaces.
Ultimately, these full-service gross lease and NNN lease structures meet the same goal, so it really comes down to preferences. If you want to expand your knowledge of commercial real estate past full-service gross leases and NNN leases, then check out this article referenced earlier.
About the Author
Veronica Baxter is a writer, blogger, and legal assistant operating out of the greater Philadelphia area.