Deciphering NNN, IG and FS

Below is a quick summary of the three main types of commercial leases: NNN, Industrial Gross (sometimes known as modified gross), and Full Service. Different submarkets and even different buildings in the same area use the three type of leases. The tenant is paying for the same thing at the end of the day, just paying in a different way. Here’s an explanation of each and how we can convert them to apples to apples to evaluate real estate alternatives.

 

 

• NNN (net lease): lease requiring tenant to pay in addition to the base rent, expenses of the property including taxes, insurance, maintenance, janitorial, etc separately.
• Industrial/Modified Gross: lease requiring tenant to pay part of the expenses of the property separately in addition to the base rent. Typically this includes electrical and janitorial expenses.
• Full Service: lease that includes all charges (base rent, electrical, janitorial, taxes). *However full service leases still have a base year, by which the tenant pays for building operating expenses and taxes above and beyond their lease’s base year.

 

 

The way to make everything apples to apples is by making every lease “full service equivalent”. This definition is when you add the additional separate expenses to the NNN and IG/MG leases to gross it up to the Full Service Equivalent. When you are evaluating options with different types of leases, you should ask what the estimated additional expenses are and add it back in to get the full service equivalent rent. A professional that has in depth market knowledge assessing options will be able to easily covert these numbers and give you back a digestible analysis. While buildings typically will not change how they write their leases, this will prepare your team and ensure there are not additional surprise payments.