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Understanding Commercial Lease Types and Costs

Commercial leases are fundamentally different from residential leases. The type of lease you sign determines who pays for operating expenses like property taxes, insurance, and common area maintenance. Understanding the differences between lease types is critical for accurately budgeting your occupancy costs and avoiding expensive surprises.

Gross Lease vs. Triple Net (NNN) vs. Modified Gross

• Gross Lease (Full Service): The landlord covers all operating expenses including property taxes, insurance, and maintenance. Your rent payment is a single, predictable number. Gross leases are common in multi-tenant office buildings and are the simplest for tenants to budget. However, the base rent is typically higher to account for the landlord's risk of rising operating costs.
• Triple Net Lease (NNN): The tenant pays base rent plus their proportional share of all three major operating expenses: property taxes, building insurance, and common area maintenance (CAM). NNN leases are standard for standalone retail and industrial spaces. While the base rent is lower, your total occupancy cost can fluctuate year to year as expenses change. Always ask for historical expense data before signing an NNN lease.
• Modified Gross Lease: A hybrid structure where the tenant pays base rent plus some, but not all, operating expenses. The most common arrangement has the tenant paying CAM charges while the landlord covers taxes and insurance. Modified gross leases offer a balance between cost predictability and lower base rent.

How to Evaluate Commercial Lease Costs

When comparing commercial spaces, always calculate the total effective cost per square foot per year, not just the base rent. A space advertised at $20/sqft NNN with $12/sqft in operating expenses costs you $32/sqft effectively, which may be more expensive than a gross lease at $30/sqft. Also factor in annual escalation clauses, which typically increase base rent by 2-4% per year. Over a 5- or 10-year lease term, escalation can add significantly to your total occupancy cost.

Tenant Responsibilities by Lease Type

Under a gross lease, your responsibilities are limited to your rent payment and keeping your space in good condition. Under an NNN lease, you are responsible for your proportionate share of property taxes (which can increase substantially after a property reassessment), building insurance premiums, and CAM charges that cover landscaping, parking lot maintenance, common area utilities, janitorial services, and property management fees. Some NNN leases also include capital expenditure reserves, which fund major repairs like roof replacements and HVAC system overhauls.

Key Lease Negotiation Tips

• Cap your CAM charges. Negotiate a cap on annual CAM increases (typically 3-5%) to protect against unexpected cost spikes.
• Request a rent abatement period. Many landlords will offer 1-3 months of free rent on longer lease terms, which can significantly reduce your effective rate.
• Audit expense pass-throughs. For NNN leases, retain the right to audit the landlord's operating expense statements. Errors and overcharges are more common than most tenants realize.
• Negotiate the escalation rate. Fixed escalation rates (3% per year) are more predictable than CPI-based escalations, which can spike during inflationary periods.
• Understand your buildout costs. Factor in tenant improvement costs when comparing spaces. A higher-rent space that is move-in ready may be cheaper than a lower-rent space requiring significant buildout.