It is the nature of the beast in our business of commercial real estate, that adjusting and then meeting or exceeding expectations, is critical to not only consummation of any given deal, but also to long term success in the business. In dealing with new tenant rep clients, there is an enormous amount of education necessary to make sure that the client understands the process and their chances of success with their given budget. They should be well aware of how leases are quoted, what the rates mean, and what potential costs might arise above and beyond the quoted rate. The broker that avoids this necessary step in client education does so at his own peril.
Many a deal has been lost and trust broken, because, for example, a broker negotiates a $20/sq ft full service lease on a space with the client, only to have the client see a deal that looks similar on LoopNet, priced at only $15/ sq foot. The client thinks the broker has negotiated a horrible deal and concludes that the broker was not concerned about their best interests. Of course, the $15/sq price did not include the common area expenses, but the client does not understand this fact and the damage has been done. An even worse case would be, after having successfully negotiated a price through a Letter of Intent, the tenant finds out upon receiving the lease that they are responsible for a slew of additional charges and they have wasted an enormous amount of time on space that is outside of t
heir budget.
The most common lease quotes are as follows:
- Full Service (also referred to as Gross) – Full service leases are typically reserved for buildings that have substantive common areas that need to be air conditioned and cleaned. Typically, most all expenses are quoted in first year rent (base year), including electric, janitorial, maintenance, management, insurance and taxes. Tenants might pay an extra charge at the end of the second year of the lease for any increase in common area charges over the base year. Multi-story office buildings are the asset class most commonly quoted Full Service.
- Modified Gross (also referred to as Industrial Gross) – Usually, under a Modified Gross (MG) lease, electric and janitorial are not included in the rate, but most other expenses are taken care of by the landlord (taxes, insurance and maintenance). Be careful making this assumption, however, as there might be other expenses that are the responsibility of the tenant. It is most common to see this type of lease quoted in garden or suburban office spaces and those properties that do not have large common areas that need heating/cooling.
- Triple Net – In a Triple Net (NNN) lease, the tenant is responsible for all of the expenses to operate the building on top of the quoted rent. As you can well imagine, there is a large spread between the price of a NNN lease and a full service lease. Equivalent properties might have a difference of as much as $8/sq ft. Retail and pure industrial tend to be quoted NNN.
While these are the three most common forms of leases quoted, Tenants should be aware that there are almost unlimited variations of leases, and landlords create their own hybrid definitions and quotes. In order to create a true apple to apple comparison, brokers and clients have to conduct careful analysis and ask lots of questions. Brokers should take the lead and properly instruct their clients prior to entering in to exhaustive searches.
Later we will cover asset and structure types and how they will affect the value that you receive in your leased space.
