Types of office lease
There are various types of office leases that are available to you as a tenant and it is good to have a fundamental understanding of what they are and how they work. You will hear the following terms when it comes to lease negotiations.
The types of office leases are as follows:
Full service lease– This lease includes all cleaning costs, electricity and maintenance costs for common areas. You may see the letters “FS” next to the lease fee when you lease an office.
net lease – this is a lease whereby the lessee pays a significant portion of the property taxes and insurance or property operating expenses incurred by the owner or lessor of the office property in Austin. You, as a tenant, will also pay for your own electricity and other utilities.
Net net net lease – also commonly known as a triple net lease. This is a lease whereby the tenant pays their prorated share of the operating expenses incurred by the property owner or landlord. These expenses are passed through to you as a tenant, you will also hear the language base year expenses, which means the first year you occupy the office space or the “base year”. Sometimes your broker can help you put a cap on incremental increases, rest assured property taxes generally increase each year. It’s also important to note that if taxes go down, the savings must be passed on to you as a renter.
modified gross– This lease is a gross lease like a full service lease where operating expenses are incorporated into the rate, but you will most likely pay for your own electricity.
lease escalations– Rate increases or increases per year are standard on most leases. You should expect increases per year. You may also hear the lease referred to as a phased lease.
Indexed Leases – These leases are tied to the consumer price index which will move up or down along with the consumer price index. Percentage Leases – A percentage lease is a lease paid by the tenant that is tied to the tenant’s sales revenue. You will find this type of lease used in commercial properties for lease. The percentage is negotiable and is tied to your gross sales. An example would be 5% of all sales over $200,000 per year. Sometimes you will have a lease percentage tied to your gross margins or net profit. This lease allows a tenant to enter a commercial space at a lower rate, allowing the owner to share in their profits as they go.