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Different Kinds of Rental Rate Structures

Posted on Mar | 2016

Mike Gross, commercial real estate agent Office for sale or leaseAgent Tips:

Different Kinds of Rental Rate Structures

By  Mike Gross

So many times, when we are either out in the market with clients/customers or hearing from someone talking about comparing rental rates, there is confusion. For instance, someone will say “Why is there such a difference in rental rates? I have seen $14 per square foot, and for a similar property, I see $18 per square foot. Why is there such a difference?” This is because the rental rates for Commercial Properties generally fall into 3 – 4 different kinds of rental rates structures. They are Full Service, Modified Gross, Triple Net and possibly Absolute Net. In Industrial Properties, there is also another classification, Industrial Gross, which is very similar to a Modified Gross Rental Rate Structure.

To explain the differences, I present the following:

1. Full Service: This means a rental rate structure where all the operating expenses for a building are included within the rate, with exception to a city, county and/or state imposed rental tax, if any. So, Real Estate property taxes, Fire and Extended coverage insurance, Repairs and Maintenance, Administration, interior Janitorial, Landscaping, Utilities (electric, gas, water and sewer) and elevator maintenance and its monthly / quarterly service contract, to name the general categories, are all included within that Full Service Rental Rate.

2. Modified Gross: This means a rental rate structure where all the operating expenses for a building mentioned above are included within the rate, with exception to a city, county and/or state imposed rental tax, if any, interior Janitorial and Utilities (electric, gas, water and sewer, telephone, internet, etc.). Sometimes the Landlord may want the Tenant to also have a maintenance contract on the HVAC and change the florescent light tubes. These are negotiable items.

3. Triple Net: This means a rental rate of $12.00, as an example, a separate amount, say $5.00 as an example, where all the operating expenses (Real Estate property taxes, Fire and Extended coverage insurance, Repairs and Maintenance, Administration, Landscaping, Utilities for the Common Areas only (electric, gas, water and sewer) and elevator maintenance and its monthly / quarterly service contract, to name the general categories, are all included within a CAM amount) for the building / complex are included within a CAM amount (Common Area Maintenance), with exception to a city, county and/or state imposed rental tax, if any. Plus the Tenant also pays the interior Janitorial and Utilities (electric, gas, water and sewer, telephone, internet, etc.) for its premises / space. The Tenant shall also have a maintenance contract on the HVAC and change the florescent light tubes. Generally, Landlord maintains the structure, walls and foundation.

4. Absolute Net: This means a rental rate of $12.00, as an example, and the Tenant pays all other operating expenses (Real Estate property taxes, Fire and Extended coverage insurance, Repairs and Maintenance, Administration, interior, Landscaping, and elevator maintenance and its monthly / quarterly service contract, to name the general categories, plus the city, county and/or state imposed rental tax, if any. Tenant also pays the interior Janitorial and Utilities (electric, gas, water and sewer, telephone, internet, etc.) for its premises / space. The Tenant covers any maintenance on the building and shall also have a maintenance contract on the HVAC and change the florescent light tubes. The Tenant also maintains the structure, walls and foundation.

  • If you are in an Office multi-tenant Garden complex, Mid-Rise or High Rise building, the Landlord will most always use a Full Service Lease.
  • If you are in an Office / Office Medical complex, you will generally see a Full Service or Modified Gross Lease.
  • If you are in a Retail complex, you will generally see a Triple-Net Lease.
  • If you are in a Single User building, you will generally see Modified Gross, Triple Net or possibly an Absolute Net Lease, especially if it was a build to suit and you are a tenant.
  • So, to our clients and customers, it could look like there is a big difference between Rental Rates at comparable buildings, but it could be due to different kinds of Rental Rate Structures being used for different types of properties.

 

If you have other questions, please contact me.

Thank you,

Michael A. Gross

Associate Broker