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 actually mean?
And, maybe a better question, why are certain lease structures utilized instead of others?
Let’s dive into what triple net (NNN), full-service gross (FSG), and modified gross (MG) mean and the differences between them.
Triple Net Leases
Tenant Pays The Operating Expenses
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 of the responsibility for those expenses?
Well, more often than not, this structure is actually 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 everything, and it ensures the property is well groomed.
Full-Service Gross Leases
Landlord Pays The Operating Expenses
Full-service gross leases are most commonly found in office buildings, but can also be found in lower-quality retail and industrial centers.
Since this lease type is the most simple of the three, it is often used by more unsophisticated landlords on all property types.
FSG means pretty much as it sounds: the lease covers all expenses.
That means that the tenant pays the landlord one fee and the landlord pays any and all expenses on the property, such as:
- Common area maintenance, taxes, insurances (the three nets)
Landlords or their property management company will be responsible for anything and everything that needs to be maintained in the building, even including changing light bulbs for tenants.
Rents for an FSG lease may be quoted as “$30 per square foot, full-service.”
Why FSG Leases Are Used
Full-service leases are very straightforward and easy to understand.
The tenant is responsible for paying their rent and the landlord is responsible for all other expenses and maintenance.
So, would tenants prefer this lease structure then?
Depending on the sophistication of the tenant and the landlord, maybe.
Since the landlord is responsible for coordinating maintenance, handling repairs, and restocking supplies, they could take these opportunities to cut costs in order to make more money.
Unfortunately, landlords like that are the reason why some buildings fall into disrepair.
Modified Gross Leases
Landlord And Tenant Pay Operating Expenses
Modified gross leases are a hybrid of the triple net and full-service lease structures.
There is no “guide” to which responsibilities fall on the landlord or the tenant in this scenario, as it can vary depending on the sophistication of the landlord, the type of business the tenant operates, the style of property, and more.
As a hybrid between NNN and FSG, modified gross can pass on any number of the expenses or responsibilities to either party:
- Landlord may pay taxes while tenant pays CAM, insurance, utilities
- Landlord may pay everything except for utilities
- Utilities may be included in rent but CAM is not
There’s really no limitation as to how these leases may be set up.
Rent on a modified gross lease may be quoted as “$30 per square foot plus tenant’s share of CAM.”
Why MG Leases Are Used
Modified gross leases offer far more flexibility for both parties during negotiations.
It may also be easier on the landlord to set up the lease payments this way, depending on how the property was constructed or set up prior to their acquisition.
Some landlords prefer to cover the “more controllable” costs, such as insurance, while passing off the “uncontrollable” expenses, like utilities, on to the tenant.
MG leases may be used on any type of real estate and can be a good compromise for both the landlord and the tenant depending on the scenario.
Which Commercial Lease Structure Is Right For You?
Unfortunately, that’s a very difficult question to answer.
The best response to just about every question in commercial real estate is “it depends.”
As you can tell, there are pros and cons for both parties in all three lease structures, so the market may help decide which route should be taken.
If all of the leases for comparable properties are modified gross, you may have a difficult time instituting a triple net lease, unless the expenses end up being around the same price.
As always, consult your commercial broker, real estate attorney, and CPA when deciding which path is best for you and your venture.