Episode 19: The 4 Lease Types You Need To Know
There are 4 basic lease types–gross lease, full service lease, gross industrial lease, and triple net lease– and it's imperative that you know the differences between them in order to compare the rates and understand what you are getting for you money. You need to know the terms that are most commonly used in leases because they ultimately impact the quoted rate.
- Gross lease is the simplest lease form. The tenant simply pays a stated amount each month. The landlord takes care of everything else; the rate does not change. Any increase in the cost of these items is simply absorbed by the landlord.
- Triple net lease is almost the reverse of the gross lease. There is a quoted base rent but that’s all you get. The tenant’s responsible for all the costs incurred in order to operate the space. In this case, the tenant has all the responsibilities of ownership but absolutely none of the advantages. When there are multiple tenants, the landlord has each tenant pay their estimated share of the expenses in advance. Then, the landlord pays for the shared expense items as they occur. The landlord also will provide some of the services needed for the common area and the costs associated with maintaining these areas are known as the common area maintenance charges (CAM). These CAM charges the expenses not specific to a tenant. They are split on a pro rata basis.
- Full service lease is similar to the gross lease except that it contains provisions to pass on escalating costs to the tenant. The landlord quotes a rate that includes paying the taxes, insurance premiums, utilities, and CAM. In order to protect themselves from escalating costs the landlord will include either a base year or expense stop. A base year approach, the landlord represents that the quoted rate will include the costs that were incurred for taxes, insurance and CAM equal to what was spent in a given year. An expense stop is similar to a base year except that instead of using the actual number for a given year the landlord simply quotes an amount. If the expenses are higher than that the expense stop amount the tenant has to pay their prorata share of the increase.
- Gross industrial lease which is similar to the triple net lease except that the lease rate includes the payment of taxes and insurance. And, the tenant is responsible for paying any increase over the amount of taxes and insurance for a given year much like a base year.
One of the major differences between the four types of lease relates to repairs and maintenance. In the full service lease and gross lease the landlord is responsible for repairs and maintenance and the estimated cost of these is included in the quoted rate and the quoted base year or expense stop. In a triple-net or gross industrial lease the tenant is responsible for the repair and maintenance of the space.
A quoted rate of $18.00 has different implications based on the lease type. You have to understand the type of lease and how the expenses are going to be handled in order to accurately project your expenses.
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