Operating expenses associated with commercial real estate properties can generally be defined by several fairly broad categories. Within these broad categories numerous additional subcategories will typically exist. We will discuss these categories and how the responsibility for these operating expenses are divided between the landlord and tenant in a given lease. Operating expenses will typically fall into categories such as:
As an example of possible sub categories we could look at the general category of “Utilities”. Underneath Utilities you could have electricity, water, natural gas, garbage collection, etc. The same can apply for several of the other categories.
The responsibility for paying these expenses can rest on the landlord, the tenant, or both depending on the type of lease agreement in place. Now let’s look at some of the popular lease types and see how these operating expenses are handled.
In general, a Gross Lease implies that the landlord will charge a higher lease payment and he will cover all the operating expenses. In a Net Lease the tenant will be responsible for all or a portion of the expenses and will incur a lower lease payment in return. There are three common types of net leases. They are the Single Net Lease, the Double Net Lease, and the Triple Net Lease. Here is how each one works:
Single Net Lease – In this type of lease the property tax, utilities, and janitorial services will be paid by the tenant(s). If there is more than one tenant the property tax will prorated in proportion to the percentage of space occupied by each tenant. Utilities may be prorated or individually metered. Each tenant will be responsible for his own janitorial expense.
Double Net lease – This types of lease similar to the Single Net lease except that the property insurance is now paid for by the tenant(s). Again, the insurance cost would be prorated according to space occupied by multiple tenants. The landlord would pay for common area maintenance and repairs. The tenant still covers the utilities and janitorial expense.
Triple Net Lease – This is the most popular lease and it requires the tenant to be responsible for the property taxes, insurance, and common area maintenance (CAM). This lease type tends to be the most landlord friendly since risk in fluctuations in operating expenses are the responsibility of the tenant.