Commercial Leases: What NNN, FSG, and MG Mean

Commercial real estate, like many other industries, utilizes many proprietary terms.

If you're looking to lease commercial space, you've likely run across phrases such as "triple net" or "full-service" whenever a broker or landlord explains what type of lease they're using.

But what does that mean? And, maybe a better question, why are certain lease structures utilized instead of others?

Let's get into what a triple net (NNN), full-service gross (FSG), and modified gross (MG) mean and the differences between them.

Triple net leases are traditionally found in retail and standalone properties.

However, in recent years, the triple net lease structure is also finding its way into office and industrial too.

NNN stands for the three "nets" in the lease:

• Common area maintenance (CAM)

• Property taxes

• Building insurance

In these leases, tenants are responsible for paying their proportionate share of these fees in addition to their base rent, utilities, and any maintenance within their premises.

Rents for a NNN lease may be quoted as "$30 per square foot triple net, with $5 per square foot in pass-throughs."

Why NNN Leases Are Used

Why would tenants sign a triple net lease and accept all the responsibility for those expenses?

Well, often, this structure is beneficial to them and the landlord.

Landlords prefer this structure, if possible, because any increases in property taxes, building insurance, common area maintenance, and more will get passed on directly to the tenant.

Tenants prefer NNN leases because they know that the additional rent they pay towards maintaining the common areas will be utilized properly.

Landlords don't make money off the pass-through fees, which tenants may also audit annually, so they won't be tempted to cut costs on the quality of the maintenance of the property.

In retail, image is extremely important, and it ensures the property is well-groomed.

Here's an explanation of the different kinds of leases and their related terms!

What's Included in a Commercial Lease Agreement?

Commercial Lease Terminology and Lease Document Sections

If you are looking for office space for your business, you'll be talking to commercial real estate people. Like other professions, they throw out terms like everyone is supposed to know what they are talking about.

To help you navigate the real estate jargon and terms you will see in a commercial lease, here are some common office and commercial leasing terms and their general explanations. Some of these terms may be used differently in various regions of the country, so be sure to ask the precise meaning of a term when you are negotiating a lease.

Lessor

The lessor is the person who is granting the lease and who has the legal obligations related to the lease contract, the landlord. Sometimes this is an owner, but it may also be a property management company or commercial leasing company.

Lessee

The lessee is the person leasing the space; the tenant. Although you may need to personally guarantee a lease, your business entity should be the official lessee on all documents relating to the lease.

Common Area Maintenance (CAM)

This term describes costs for areas in a building that are not directly leased but which are a common responsibility, such as hallways, restrooms, stairways, and walkways. Most lessors add CAM costs to square footage costs to calculate lease payments.1

Fully Serviced Lease

A lease in which the rental payment includes other services, such as utilities, maintenance, and lawn/snow removal services. The landlord pays these fees and passes them on to the tenants in the lease. This can be a benefit to tenants as it saves them from having to pay these additional fees, but the landlord may be charging more than is being paid for these services.

Gross Lease

A lease that includes the landlord agrees to pay for all common expenses, including utilities, repairs, insurance, and (occasionally) property taxes. The cost of a gross lease is higher than for other types of leases because all these items are included in the amount of the lease

Net Lease

A lease that includes the square footage costs, CAM costs, and all other ownership expenses, including utilities, repairs, insurance, and property taxes.

Double Net Lease

A lease in which taxes and insurance expenses are included in the lease payment. The lessor pays maintenance costs.

Triple Net Lease

A lease that includes all taxes, insurance, and maintenance costs in the monthly payment.

Gross Square Foot

The total square footage of the building or office being leased. This figure usually includes common space.

HVAC

An abbreviation for 'heating, ventilating, and air conditioning.' It's often pronounced as

"H-VAC."

Build-out/Leasehold Improvements/Tenant Improvements

The improvements to the office or building to make it usable for the tenant. In accounting terminology, these costs are called "leasehold improvements," and they can be depreciated as expenses.

Turn-key

An office or building that is ready to occupy. In most cases, this is a commitment by the landlord to bear the cost of any build-out.

Sub-lease

A sublease is an agreement between the lessor and lessee to allow someone else to use all or part of the space. In some cases, a business may wish to have another business to share the space - and the rent. In other cases, the tenant may want to leave before the lease term is up, and to have someone else take over the lease, to avoid having to re-negotiate.

Common Sections in a Commercial Lease Agreement

Premises. The detail of the building or unit, including the address, condition. Most commercial leases are made "as is," meaning that the lessee accepts the condition.

The lease term is usually expressed in months. This section includes both the date the lease is effective and the date the lessee begins to occupy the space.

Rent and payment. There may be a base rate and a separate CAM rate. This section describes when the rent is due, what happens if it's late,

Security deposit. This amount may be equal to the first month's rent, to be returned to the lessee at the end,

Rent adjustment explains when the rent might be adjusted for taxes, cost of living increases, or additional operating expenses.

The renewal option relates to how and when the tenant can renew the lease and any changes in rent for the additional terms.

Common areas are defined and discussed, including the responsibilities of the management and the lessee for management and control.

Utilities paid by the lessee are described, including what happens if the tenant doesn't pay the utilities when they are due.

Use of Premises. How the lessee is using the premises, what activities are prohibited, and nuisance issues are described.

Insurance. Lessor and lessee responsibility for insurance and the amount of liability insurance the lessee must prove.

Maintenance and repairs. Responsibility of the lessee and the landlord for maintaining the premises and making repairs.

Improvements, Alterations, and Additions. The landlord must consent to any alterations or additions, including initial improvements.

Subleasing. Most landlords do not allow subleasing unless it's by the consent of the landlord—circumstances under which the lessee can assign or transfer the lease to someone else.

Landlord Access. When the landlord can have access to the premises, and how much notice must be given.

Default. What conditions mean that the tenant has defaulted (broken) on the terms of the lease, and what remedies the landlord has.

Termination. How the lease can be terminated by either lessee or lessor, and what notice must be given.