The Difference Between NNN, MG, & FSG Leases
This is How-To's, How Comes, And What Are's, where we answer the most common questions about commercial real estate asked around Orange County.
Today's question was inspired by a phone call I received earlier this week:
What's The Difference Between NNN, MG, & FSG Leases?
When Are These Lease Types Used, And What Are They?
If you plan on opening a business, big or small, within a building that you do not own, you will incur one of these lease types. To explain how they work in simplistic terms, here's a quick explanation:
The landlord of the property/space you're interested in leasing has operational expenses to keep said location desirable to customers, tenants, and investors. These operational expenses include the following:
Repairs & Maintenance
Property Management Costs
These expenses have their own costs, as you can imagine, and the landlord is responsible for paying for all of them if he wants to keep his property pristine. Now, in the commercial real estate world, there are several ways as to which the landlord can offset some of these costs (lower the amount they pay). These offsets are known as 'Tenant Reimbursements', or more specifically, Triple-Net (NNN), Modified Gross (MG), and Full-Service Gross (FSG) leases. Although these lease types have different names, they all focus around three main expense items: property taxes, insurance, and utilities.
The remaining expenses not included are typically paid for by the landlord, or added onto the rents for tenants who are being charged a Common Area Maintenance (CAM) fee. We'll get into CAM in a different blog post, let's stay focused on lease types.
The NNN, MG, & FSG lease types are additional expenses added onto a business's base rent each month, typically in the form of a $/Square foot amount. For example:
You lease a 1,000 SF storefront for $2.00/SF
Your share of NNN will come out to roughly $0.50/SF
1,000 x 2.00 = $2,000/month in base rent
1,000 x 0.50 = $500/month in NNN expenses
Total rent = $2,500/month
Property taxes and insurance usually stay consistant throughout the year, while utilities will fluctuate based upon usage.
Let's break down each lease type a little more.
Triple-Net Lease (NNN)
The most common lease type for retail store owners in Orange County. A triple-net lease, or NNN for short, occurs when the landlord passes off 100% of the bill to the tenant for reimbursement.
Remember, 'The Bill' relates to your share of the costs incurred for property taxes, insurance, and utilities (unless otherwise agreed upon). So, if you lease 1,000 square feet within a 100,000 property, you will pay 1% of these expenses over 12 months.
Modified Gross (MG)
This lease type is rare amongst all asset types, however, you will typically see it most often for tenants leasing out office space. A modified gross lease occurs when the landlord and tenant agree to split the bill a certain way. For instance:
The landlord agrees to pay your share of the taxes, but you will need to cover insurance and utilities.
This can be done in any which way and it really comes down to the relationship between both parties.
Remember, 'The Bill' relates to your share of the costs incurred for property taxes, insurance, and utilities (unless otherwise agreed upon). So, if you lease 1,000 square feet within a 100,000 property, you will pay 1% of your share of the expenses over 12 months.
Full-Service Gross (FSG)
Most common for industrial tenants, a full-service gross lease occurs when the landlord agrees to pay for all expenses. Usually, the landlord will bake-in most of these projected costs into the tenants rent, but it can be very beneficial to a tenant that uses a lot of water and/or electricity. Without the responsibility of having to pay the utility bill, the tenant can really maximize their business's output.
Remember, 'The Bill' relates to your share of the costs incurred for property taxes, insurance, and utilities (unless otherwise agreed upon). So, if you lease 1,000 square feet within a 100,000 property, you will pay 0% of your share of the expenses.
I hope that helps explain things a little better. Commercial real estate can be a tricky world to understand, so having someone in your corner to help you understand each step is crucial. If you have any questions, feel free to set up a phone call with Wyatt or give him a call directly. If you're setting up a phone call, please set it up at least 24 hours in advance.
Until next time, have a great week!