Demystifying the Lease Pricing Models
If you are looking into leasing a building you own or a tenant looking for a new location, it is important to know about lease pricing models and which one you are going to use. There are three primary lease pricing models: triple-net leases (NNN), full-service (gross lease), and modified gross. It may seem complicated, but they actually make a lot of sense. Let’s take a minute to walk through how each of them works.
Triple Net Lease (NNN)
Triple-net is probably the most complicated of the three lease pricing models. ‘Triple Net’ comes from the three additional net expenses that you pay on top of your base rent: real estate taxes, property insurance, and common area maintenance. The rent is fixed-cost (obviously), while the additional (Triple Net) expenses are budgeted annually and reimbursed monthly on a 1/12 basis for the year.
The triple net components are:
- Real Estate Taxes
- Property Insurance
- Common Area Maintenance
- Grounds maintenance
- Interior janitorial services
- Exterior window/building cleaning
- Trash and recycling removal
- Site lighting repairs and electricity
- Elevator inspections/maintenance
- Fire alarm inspections/monitoring/maintenance
- Property management fees
- Water/sewer expenses
These expenses are then reconciled at the end of the year. If the budget was too low, the tenant pays the difference. If the budget was too high, the landlord reimburses in order to ensure that the tenant only pays the pro-rata share of actual expenses. Typically, the tenant has the ability to audit the triple net cost by reviewing accounting statements and invoices paid. This is the most accurate of the lease pricing models, but it is also the most complicated and work-intensive.
Full-Service (Gross Lease)
This lease type is much simpler for the tenants because they only have one payment to worry about. It includes all the different components of the triple net expenses but with no reconciliation of costs. This is a great model for companies requiring strict budgeting. This model can be riskier for the landlord, however, because cost overruns, escalations or other unbudgeted expenses become the sole responsibility and risk of the landlord with no reimbursement from the tenant. Conversely, this model could also be more profitable for the landlord if building expenses remain low because the budget savings become additional profits for the landlord.
Lastly, modified gross is simply a hybrid of triple-net and full-service. This can vary widely as it is up to the landlord to determine how this works. The general idea is that some of the triple-net expenses are by pro-rata share, while some are just estimated and included in the regular rental rate. The tenant might only pay a pro-rata share of real estate taxes and insurance while everything might be included. It can be split up in countless ways per the landlord’s desire.
Once you have gotten the general ideas, none of the lease pricing models are too complicated. The difficulty comes in implementing them. There are a fair amount of intricacies, and it can sometimes become overwhelming to deal with everything. That being said, there is a saving grace:
If you own a commercial property that you are leasing or are a business looking for new space, have a company like Blackwolf Commercial take care of it for you. They are experts in their field and make your job much easier.