When comparing different office spaces it is important to consider the structure of the lease. One property may advertise a lower rate per square foot, however, the structure of the lease affects your all-in monthly rent. Here we will break down the two most popular terms used in office space marketing, full service gross (FSG) and triple net (NNN) leases, to help clarify what you may see while searching for an office.
Triple net leases tend to be misunderstood - even by some real estate professionals. A triple net lease puts certain expenses on the tenant that, under other structures, may typically be covered in the base monthly rent payment. Consider a NNN lease like an a la carte menu, where the base rent advertised is only one of the costs associated with your office space. In addition to the base rent in a net lease the tenant will also pay their proportionate share of operating expenses for the building. These operating expenses, or OpEx, break down into three categories: taxes, insurance, and utilities. In most cases the landlord or broker representing the property can give you a breakdown for the average of each expense. In some cases, averages may be advertised in the listing materials.
It’s important to keep in mind with a triple net lease the tenant will be expected to cover expenses that go beyond the standard operating expenses. In most cases, the tenant is expected to pay for repairs to the space and/or the building itself as well as any common area maintenance fees (CAM). Triple net leases are very common in new construction or single tenant buildings.
Full service leases can be referred to as an all inclusive lease. The operating expenses (insurance, taxes, utilities) and CAM (common area maintenance fees) are all included in the advertised rate. Services that vary from business to business, such as; internet, phones, and in some cases janitorial, are expenses the tenant will be expected to pay for on their own. While Full Service leases are attractive because of their all in cost structure, they are not exempt from rent increases. It is very common for increases in the amount paid year over year. Full service lease structures are typical in large multi tenant buildings. If the landlord feels comfortable predicting expenses for the building, they may choose to use a full service structure for their lease.
Regardless of the rent structure of a lease, it’s important to know it’s typical for a landlord to conduct an audit of building expenses at the end of each fiscal year. In a full service lease, if expenses were less than anticipated, tenants will typically receive a credit to their monthly rent over the following fiscal year. If expenses were more than expected, it’s typical for the additional cost to be built into the monthly rent over the next fiscal year.
With each property you consider, it is best not to draw too many assumptions as to what is and is not included the monthly rent. Only after a review of the specific language of your lease will you be able to understand what the tenant is expected to cover versus what the landlord is expected to cover. Hiring a real estate attorney to review the lease contract will help you gain a full understanding of the total cost as well as prevent any costly mistakes down the road made from a misinterpretation of the lease today.
When working with our clients to search the market we work to uncover all the answers to questions about lease structure and all in monthly costs upfront. This is just one of the ways we make searching for commercial office space easier! Start here to search for properties in your area.
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