Commercial Real Estate – Rent Formats
When looking to lease commercial real estate, you will be confronted with a variety of rent formats depending on the type of space you are trying to find. The options include full service, industrial gross, modified gross, net of utilities or some other expense and triple net, also shown as NNN for those that typically text instead of call. Most suburban office buildings offer full service leases. This means that all of the utilities, common area maintenance, real estate taxes, building insurance, janitorial/trash services and other expenses are already included in the first year’s rent. As the lease term progresses, tenants pay increases in the operating expenses and real estate taxes above a base year. The base year is determined by the cost of these items during the first year of occupancy and then the tenant pays increases above the base year each year thereafter. If there is no increase in operating expenses or real estate taxes, then there is nothing to be paid by the tenant, but don’t worry there are always increases to pay. And before you ask, what happens if expenses decline, nothing to fret over, the base year does not get reduced, but neither does your rent. Amazingly, expenses never seem to decline. Base year expenses for full service buildings in Montgomery County run between $8 – $15 per square foot depending on the quality of the building and level of services that are provided.
Industrial and modified gross rents are generally associated with warehouse and flex properties. With these rent scenarios items like common area maintenance expenses and real estate taxes are included in the rent with a base year format like a full service lease, however, expenses such as janitorial/trash expenses and building insurance are paid by the tenant as additional rent and a reimbursement to the landlord. With some properties the janitorial services are contracted for directly by the tenant through the appropriate vendor or in some cases the tenant just buys a vacuum cleaner and assigns an employee to clean the space once a week. Utilities are separately metered and paid directly to the utility company. This type of rent structure is more common in Howard County and the Baltimore area.
Triple Net rents are structured with the Tenant paying a base rent that does not include any of the operating expenses for the property or the premises. Common area maintenance, real estate taxes, building insurance, janitorial and trash removal services are paid by the tenant as additional rent. Utilities are separately metered and paid directly to the utility company. Triple Net rents are most commonly used at retail properties as well as with some warehouse and flex buildings. Triple Net expenses for retail properties will range from $5 – $25 per square foot depending on the location and type of retail center. Warehouse and flex space NNN expenses are generally $3 – $5 per square foot in Montgomery County.
It is good to be familiar with all of the different rent structures. When speaking with a landlord make sure to confirm how the rent is being charged. Signing a lease that you think is full service, but is actually NNN can be very expensive. Also, be sure to get a breakdown from the landlord of the expenses that are included in the rent structure and a breakdown of the current cost of each expense. For older properties, it is also a good idea to ask for a historical summary of the expenses as this will give you an idea of any potential problems with the property and/or provide some insight into the quality of the property management.