In order to sound like you know what you are talking about in the commercial lease market, you first need to learn a few new vocabulary words, of which rent structure terminology can be the most confusing.
Finding commercial space is not as simple as looking for an residential apartment. There are other hidden costs and factors that you will need to address as well. You can’t just look at the base rent rate of the property. You also have to be aware that you may be responsible for additional expenses, such as property tax, maintenance, property insurance, and utilities.
First of all, base rent is often described in either cost per square foot per month or cost per square foot per year. I prefer to use square foot per month. In 2010, depending on the market, medical office spaces can run from $1/sf/month to $3/sf/month. In the Bay Area, medical office spaces go for $2-3/sf/month. In contrast, general office spaces go for $1-2/sf/month. The reason being that our operating expenses are larger. Often times, we use many small rooms, with individual lighting and plumbing requirements. Also, some specialties have large electrical demands, which at times even require additional power generators.
Despite base rent being the tip of the iceberg, it’s definitely the first thing I looked at when evaluating a property. However, the base rent can be deceiving because its definition can be different for each property. Some spaces will come with the works, including utilities, insurance, taxes, and maintenance. Others will offer bare bones base rent with no other features. Most will fall somewhere in between.
Here is a list of different forms of rent structures:
1. Triple Net (NNN)
Most common form. This type of lease can be pricey because the landlord has a near laissez-faire approach to the property. Pretty much, the landlord collects the rent, and that’s it. The tenant is responsible for all costs, including property tax, property insurance, and maintenance of your own space as well as your share of the common area (ie. hallways, elevators, stairs, etc.). For example, I’ve encountered triple net spaces that asked for $1.75/sf/mo, but with triple net costing an additional $0.90/sf/mo. Then, you should just assume that your rent will be $2.85/sf/mo, not $1.75.
2. Double Net (NN)
Base rent + property tax + property insurance. Landlord pays for maintenance.
3. Single Net (N)
Base rent + property tax. Landlord pays for maintenance and insurance.
4. Bondable (Absolute NNN)
Landlord has absolutely no legal responsibilities to the property.
1. Full Service Gross Lease
The landlord pays for everything, including taxes, maintenance, insurance, and utilities. The tenant is responsible for personal property insurance, property taxes, and utility expenses beyond the permitted building standards. The tenant is also responsible for his or her share of any increase in the operating expenses of the building in subsequent years.
2. Modified Gross Lease
Similar to a full service gross lease, except that certain basic services such as taxes, maintenance, insurance, janitorial services, electrical services, etc. are excluded from the lease. Most commonly, maintenance, electrical, and janitorial services are excluded.
There are some other variations, but I encountered these forms the most. So, just because the base rent is dirt cheap doesn’t mean you should jump on it. You have to find out what the base rent gets you. Usually, in a similar market, triple net leases will have lower base rent rates, and full service gross leases will have higher base rent rates. They both end up costing you a similar monthly payment, but you still need to be aware of this concept.