There are many different types of commercial lease agreements for Landlord’s to use. Over my 27 years in the Commercial Real Estate Industry, representing many landlords, I’ve found certain leases work for certain people and certain properties.
Before reviewing the lease types below, please note the following:
+ In the State of Florida, all commercial lease agreements are subject to sales tax. Sales tax is calculated on the total rents received including any additional rent stated in the lease agreement. Sales tax may vary between counties, so make sure you are using the correct percentage. For example, Escambia County is 7.5% and Santa Rosa is currently 7%. These percentages can change!
+ All commercial lease agreements over one (1) year require two (2) witnesses per signature. If you do not, your lease may not be valid.
+ Last, but not least, we recommend you have a real estate attorney draw up your lease.
Let’s discuss the different types of leases. Hopefully, the information below will help you decide which lease is right for you and your building.
NNN (Triple Net) Lease
First, what does NNN stand for? The Rent is Net Net Net of Real Estate Taxes, Property Insurance, and Operating Expenses. Rather than being included in the (base) rent, these costs are separated out and charged as “additional rent.” This “additional rent” is also subject to sales tax. If a tenant is leasing 100% of the building, it is responsible for 100% of these costs. If the tenant is leasing a portion of a building, they are responsible for its pro-rata share of these costs. This lease is meant to provide a base rent amount with the tenant paying a pro-rata share of the NNN expenses (usually on a monthly basis). In addition to the NNN expenses, and as with most other leases except for “full service” leases, the tenant would be responsible for other expenses like utilities, telephones, internet services, janitorial, etc.
Gross Lease
Over the years, this type of lease seems to be preferred by both the landlord and the tenant. This lease not only includes the base rent, it also combines the NNN charges (Real Estate Taxes, Property Insurance, and Operating Expenses). For instance, if the landlord is advertising a NNN lease with a Base Rent of $12.00 PSF and assuming the NNN charges are $5.00 PSF, then the Gross Lease would become $17.00 PSF gross. Tenants should expect annual increases at about three percent (3%) on average. Tenants are still responsible for all utilities, janitorial, etc.
Modified Gross Lease
This lease is like a Gross Lease, except some expenses that are normally paid by the Landlord become the responsibility of the Tenant.
Full-Service Lease
In a Full-Service Lease Agreement, the landlord pays for all the expenses in the building. This includes janitorial, all utilities, real estate taxes, insurance, and operating expenses. In most cases, a Full-Service Lease is used in a multi-story office building where the common area is shared by all tenants and there is one utility meter for water, sewer and electric.
Here are a few quotes from various Landlord’s and their reasoning of why they use certain leases.
This one is from Clark Thompson, who is an owner of various downtown Pensacola properties. He prefers using a full-service lease agreement.
“Over the past four decades of leasing office space, I have personally found that providing full-service to tenants has advantages for both parties. For budget planning purposes, most of my tenants like knowing that their monthly lease costs are fixed. In turn, as a landlord, I can maintain my buildings to a high standard without worrying about whether or not the tenant is living up to any maintenance obligation which may have otherwise been provided in their lease.”
This next one is from Steve Moorhead of McDonald, Fleming & Moorhead, who is a real estate attorney and owner of various retail and office properties. He prefers to use an NNN Lease Agreement.
“I like using NNN leases for the following reasons. Institutional purchasers prefer purchasing NNN properties, it is easier to see the real return that’s attributed to ownership, and last but certainly not least, it eliminates any incentive for the landlord to manage the “property” on the cheap.”
Landlords, please know your options. One may work better for you than the other. We recommend to always consult a real estate attorney in any real estate transaction.
This article was originally published in our annual magazine, Insight. Get your copy of this 100-page resource packed with articles to help you and your business grow. Downloading it now and you will also receive our quarterly Market Report focused on commercial real estate in Northwest Florida each quarter!
