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Noozhawk: Brian Johnson: Breaking Down the Types of Commercial Leases

May 26, 2021

So you have found the perfect place for your business and it is time to negotiate the lease. Aside from the basics such as term and rent, what should a tenant (lessee) be looking at in their commercial lease?

Santa Barbara, California – Published 5/26/2021
By Brian Johnson, Managing Director, Radius Commercial Real Estate; President, Santa Barbara Association of Realtors

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Brian Johnson, Managing Director Radius Commercial Real Estate
Brian Johnson, Managing Director, Radius Commercial Real Estate; President, Santa Barbara Association of Realtors

There are three main types of commercial leases, and depending on which one the property owner (lessor) wants to use will determine what your responsibilities are as the lessee. Who is paying the real estate taxes? Who maintains the air conditioning? Who is responsible for utilities?

These are not small expenses, and depending on the lease used it can make the difference in making your business successful. There are three main types of commercial leases; triple net (NNN), modified gross (MG), and full service gross (FSG).

A triple net lease (NNN) means that in addition to paying your base rent, you are responsible for your proportionate share of property taxes, insurance and common-area expenses for the property. The charges are not limited to those three items, but they are the big ones and thus why they call it a triple net lease.

There is very little that is not passed on to the lessee by the lessor, and these types of leases are preferred by lessors and usually used for investment properties.

A Full Service Gross lease is one in which the rent the lessee pays is inclusive of everything, including utilities. These leases are the simplest in terms of a lessee understanding their responsibilities. They pay a single amount and the lessor covers the costs for everything.

Often, these types of leases will have an expense stop or cap where a lessee may be responsible if the expenses exceed a certain level. This type of lease is most popular for lessees for obvious reasons.

Modified Gross leases are a middle ground between NNN leases and FSG leases. In a MG lease, the lessee is responsible for paying the rent and utilities and, depending on how the lease reads, a portion of the common-area expenses. In some leases, the lessee is responsible for any increases in the expenses after the first year.

This type of lease is very flexible in handling expense responsibility and so they can be a good compromise for lessors and lessees.

These descriptions are not absolutes, and often lessors and lessees can negotiate terms that will alter these to work in a specific situation. That is why it is important to have an experienced commercial real estate agent working for you in your negotiations. They see dozens of leases every year and will be able to assist you in negotiating the best terms for your agreement.

Brian Johnson is the new president of the Santa Barbara Association of Realtors. He is a California licensed real estate agent and the managing director of Radius Commercial Real Estate. Brian handles all types of commercial real estate transactions, but has a special focus on multifamily investments. He can be reached at 805.879.9631 or bjohnson@radiusgroup.com.

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