Real estate leasing agreements come in two types: modified gross lease and triple net lease. When renting a commercial space, these two forms of leases are widely employed. They each have their method of dividing costs between the renter and the landlord.
You should be aware of these two terms before signing an agreement. Everything you need to know about modified gross leases and triple net leases may be found in this article.
MODIFIED GROSS LEASE
A modified gross lease is a type of agreement where the expenses are shared between the tenant and landlord. In a modified gross lease, the tenant is responsible for paying base rent in addition to some operational costs like utilities, interior maintenance, small repairs, and janitor cost. On the other hand, the landlord I responsible for paying all the operational expenses like building taxes, exterior maintenance, big repairs, and property insurance.
Some modified gross leases include an expense stop. This implies that the cost of the building’s operating expenses is fixed for the first year of the lease. Any increases after that are passed on to the Tenant.
MODIFIED GROSS LEASE: PROS & CONS
- The corporate tenant has better budgeting control over the expenses that directly affect their business operations, such as salaries, rent, business taxes, and so on. This is because the landlord bears the maintenance costs.
- Corporate tenants prefer modified gross leases since they are not liable for the building’s upkeep. This allows corporate renters to concentrate on the most significant aspects of their operations.
- Modified gross lease allows the tenant complete control over the bills he or she is responsible for, such as energy. A modified gross lease allows landlords to keep control of their properties. It enables them to keep the property in proper repair and avoid maintenance disputes with careless tenants.
- Tenants who have a modified gross lease have less control over the look of the building. Because landlords are responsible for maintaining the appearance of the building, if the landlord is negligent in cleaning and maintaining the property, it will have an impact on the firm’s operations.
- In contrast to a standard gross lease, costs in a modified gross lease are likely to change. This can have an impact on company financial planning. In addition, due to the landlord’s overestimation of expenditures, the tenant had to pay a little extra.
TRIPLE NET LEASE (NNN)
Triple net leases are also known as net-net-net leases or NNN leases. In this type of lease, all the expenses related to the building are passed on to the tenant. This implies the tenant is liable for the base rent, as well as property taxes, insurance, utilities, maintenance, and repairs. This also implies that, in addition to running the business, the tenant will be responsible for everyday maintenance, major repairs, improvements, and renovations.
TRIPLE NET LEASE: PROS & CONS
- The landlord bears only a minimal amount of responsibility because the renter has taken all of the responsibilities.
- Generally, Triple net leases have a longer lease term. As a result, landlords can be assured that they will continue to collect rent for some time without having to worry about replacing vacant properties.
- Another advantage of a NNN leased investment is that the landlord has the right to sell the property even if it is leased. In the industry, triple net properties are known for being easier to market than other asset classes. Because the lease is transferred with the sale of the property, the tenant will be able to continue doing business as usual if the landlord sells the property. The property’s new owner will honor the original lease agreement and adhere to all of its terms and restrictions.
- In a NNN lease, it’s impossible to add value through forced appreciation because you can’t change the rentals or modify any of the lease terms once it’s signed. If your tenant wants to change the conditions of the lease, such as the rent amount or the term duration, this is a great opportunity to get some advantageous terms from the landlord in exchange.
- Even if the tenant is responsible for costs such as insurance and upkeep, if the tenant fails to do so, the owner is ultimately responsible for the costs. If the tenant does not pay his or her taxes, the property owner is exposed and liable for the costs.
- The triple net lease allows the property owner to lease the property for a reasonably long base period, ranging from 5 to 25 years. Options range from 10 to 50 years beyond that. However, every landlord must understand that the tenant will eventually go and that the property will remain vacant with no income. When the lease period ends, the tenant has the option to quit; however, the property owner will be required to incur costs before leasing the property again by repairing it before putting it on the market for lease.
I hope that this article may provide some insight into the process of signing a business property deal. Depending on your needs, a modified gross lease or a triple net lease are both viable options. Whether you’re a renter searching for a place to call home or a landlord trying to fill a vacancy, working with professionals who can negotiate the most favorable deal for you is essential.