Net Leases vs. Full Service Leases in Commercial and Industrial Properties

Net Leases vs. Full Service Leases in Commercial and Industrial Properties

The leasing of commercial and industrial properties involves a variety of agreements, each with its distinct allocation of responsibilities between the lessor (owner) and lessee (tenant). Understanding the differences between Net Leases and Full Service Leases is crucial for both parties.

Full Service Leases

In a Full Service Lease, the lessor is responsible for all operating expenses. This comprehensive coverage includes taxes, insurance, repairs, utilities, and other maintenance costs. The tenant benefits from a predictable expense structure, as these costs are typically integrated into the lease payment.

Net Leases

Net Leases shift some of the operating expense responsibilities to the tenant. There are different levels of Net Leases:

Net Lease: The tenant pays certain operating expenses, which could include any combination of costs except the major ones.

Net Net Lease: Here, the tenant is responsible for two significant expenses: taxes and insurance.

Triple Net Lease: This is the most extensive form of Net Lease, where the tenant bears the cost of all significant operating expenses: taxes, insurance, and utilities.

True Triple Net Lease

In a true Triple Net Lease, the tenant covers all operating expenses, leaving the lessor to simply collect the rent. It’s crucial to read these lease agreements carefully, as the term "triple net" is sometimes applied loosely to leases where the tenant does not bear all expenses.

Common Misunderstandings

In many leases labeled as "triple net", certain expenses like management, common area maintenance, and utilities for these areas may still be paid by the lessor. This discrepancy necessitates a careful review of the lease terms.

Multi-Tenant Buildings and Expense Allocation

In multi-tenant buildings operating on a triple net basis, significant expenses such as real estate taxes, insurance, and common area costs are often distributed among the tenants. This allocation is typically based on the net rentable square footage of each tenant's space relative to the total net rentable area. Net rentable square footage refers to the actual rentable area, excluding common spaces like hallways and lobbies.

The choice between Net Leases and Full Service Leases depends on the preferences and capabilities of both the lessor and lessee. Full Service Leases offer simplicity and predictability for tenants, while Net Leases provide more control over expenses and potential cost savings. Understanding the specifics of each lease type is essential for making informed decisions in the commercial and industrial property markets.

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