Explaining Gross, Modified Gross, & Triple Net Lease Agreements in CRE

Know the differences before you sign

Entering into an industrial, retail, or commercial lease agreement can be a little bit exciting, a little bit nail biting, and a lot confusing. That last item is often a result of some head-spinning terminology that is key to understanding and budgeting for the price per square foot.

Typically, this amount is displayed as gross, modified gross, or triple net – three approaches in how costs are allocated between tenant and landlord. The kind of lease is shaped by the type of building or the location of the property. Knowing the difference before signing on the dotted line can mean the difference between the start of a grand adventure or breaking the bank.

Gross Lease

Gross is the most basic square-footage term, and it is often used in residential leases and class “A” office leases around the country. It indicates that the lessee has agreed to pay the gross price per square footage and the landlord has agreed that the additional expenses that come with ownership (repairs, insurance, utilities, and sometimes taxes) are included in the total rent. Most leases have an escalation clause on either the gross or net rent amount.

If the gross lease calls for $20 per square foot, the tenant agrees to pay that amount for a specific period of time. The landlord will have also included (factored in) various expenses when quoting that amount and accepting the fixed monthly payment.

Pros and cons of the gross lease

• Because this is essentially one-stop-shopping, it’s easy for the tenant to budget lease costs.
• The Tenant pays a rent increase on both the base rent and operating expenses – which themselves are subject to change and could create the framework for a “double dip” on increases that the Tenant would have to pay.

Modified Gross Lease

The name says it all : a gross lease with modifications. In this agreement, both parties agree to pick up various costs. A modified gross lease is most often used for office-complex suites.

Each modified gross lease is different, depending on the building or the business that is hoping to become a tenant. Modifications can require the tenant to pay for cleaning services and contribute to common area maintenance (CAM), while the landlord pays real estate taxes and property and building maintenance. A modified gross lease usually has the Tenant paying for cleaning and utilities.

Some modified gross leases also come with an expense stop, which means the cost of the building operating expenses is stable for the initial year of the lease and any increase above that is passed along to the Tenant.

Pros and cons of the modified gross lease

• It remains a simpler lease structure with no additional pass-through for expenses.
• Most tenants have the right to audit the lease expenses and most landlords are required to refund the over-collection of operating expenses if the lease is fairly structured.

Triple Net Lease

The bigger or more complex the structure (such as a strip mall or chain-store spaces), the more intricate the lease arrangement becomes. In this case, the tenant agrees to pay rent as well as all operating costs, which are broken down into three (net-net-net) areas: real estate taxes, insurance, and maintenance … and/or utilities, depending on the type of building and unit the tenant is occupying.

Pros and cons of the triple net lease

• The tenant assumes the risk of increases in property taxes and insurance.
• For some NNN leases, the Tenant is responsible for maintenance of the interior and exterior structural components of the building and their premises.

The importance of using a firm that knows the difference

Whether you’re a tenant looking for space or a landlord looking to fill a space, it’s imperative to work with professionals who can negotiate the best arrangement for you. At Morris Southeast Group, our team is skilled at tenant and owner representation, as well as property management.

For a free consultation or to learn more about our services, call Morris Southeast Group at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

The Ideal Mix In A Mixed-Use Building

Add residential, retail, and other commercial tenants and stir

Ever since mom and pop lived above their haberdashery and assorted sundries shop, mixed-use buildings have been a staple of countless cities and towns. And these properties have evolved to become essential components in the design and building of livable, workable, and walkable neighborhoods and downtowns.

In today’s world, where buildings and footprints are larger and taller, the people upstairs are more likely to be customers than owners of the businesses at street level. Creating the perfect mix in a mixed-use setting is necessary to satisfy both residential and retail tenants. Although there isn’t one perfect recipe, there are several key ingredients.

Working with the retail tenant

When it comes to residential and office tenants, there is very little interaction between them and their landlord or building management. For the most part, everyone goes about his or her day until something comes up.

That dynamic changes with the retail tenant, many of whom have leases that include a percentage rate clause. Increased sales for the retail tenant translate into an additional rent percentage for the landlord/manager. This monetary incentive often results in greater contact between the tenant and building management, the latter of whom often feels compelled to problem solve and market the retail space.

When the customer is always right

On the one hand, retail tenants have the usual concerns of any tenant: price per square foot, ceiling heights, facilities, maintenance, etc. On the other hand, they have – and must have – a keen awareness of how their location impacts the customer experience. As a result, one of the most frequently asked questions is, “Who is above me?” Any disruption to potential revenue not only has a negative impact on them – it can also leave the landlord with a vacant storefront.

In addition, the customer experience is constantly evolving and often requires the landlord or building management to improvise. Consider a retail establishment that does so well that parking becomes an issue for that tenant, neighboring retail tenants, and the residents above. Both tenants and landlords must adapt to and ideally plan ahead for these scenarios.

Speaking of the people upstairs …

Perhaps the most important ingredient in determining the mix in a mixed-use building is to be mindful of the residents who will be living above any retail space. Businesses that create excessive noise, smells, vermin, and trash generally lead to the most complaints from upstairs neighbors.

A solution is for the landlord/building manager is to match the retail tenant with the residential tenant and/or the neighborhood. Some examples:

• A satellite dry cleaner – one that collects the laundry and sends it out for cleaning –

would work well in an area where there aren’t any dry cleaners.

• Millennial tenants may be more interested in living near a coffee house or socially-conscious boutique, while young families may need a small corner market to pick up some milk or fruit.
• Baby boomers may prefer something more upscale, while senior citizens may opt for a location featuring a small medical office. In Fort Lauderdale, for example, Riverwalk Residences of Las Olas will have medical offices at street level.

Key ingredients that work for Morris

Managing a mixed-use property requires some of the same skills that have helped Morris Southeast Group successfully serve our clients: open and clear communication, understanding the specific nuances and needs that inform a smart CRE strategy, and transparency to head off any anxieties.

For a free consultation or to learn more about our property management services and/or mixed-use opportunities, call Morris Southeast Group at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.