What each structure actually covers
- Gross, or full service. One payment. Landlord covers taxes, insurance and common area maintenance. Utilities may or may not be included, which is the detail tenants most often miss.
- Triple net. Base rent plus three pass-throughs: real property taxes, building insurance and common area maintenance, at your proportionate share, usually your square footage divided by the building's leasable square footage. Base rent looks attractive. The pass-throughs are where the real number lives.
- Modified gross. A negotiated middle ground. A common industrial version has the landlord carrying taxes and insurance while the tenant pays utilities and interior maintenance, with CAM either bundled or capped. Because it is negotiated rather than standard, read your specific lease instead of trusting the label.
All three of our Metro Detroit properties lease modified gross.
Why base rent comparisons mislead
A suite quoted at a low triple net base rent with meaningful pass-throughs can land at or above a higher modified gross rate, and it carries the risk that the pass-throughs rise. Two quotes are not comparable until you know the structure and the estimated additional rent.
Ask every landlord two things, in writing:
Current estimated additional rent per square foot.
The prior year's actual reconciliation for that building.
A landlord who will not provide either is telling you something.
Where the surprises hide in a triple net lease
In rough order of how much money they move.
Capital expenditures. Can the landlord charge a new roof or a parking lot replacement to CAM? Well-drafted landlord leases say yes, sometimes amortized over useful life and sometimes not. This is the largest potential pass-through and the one tenants read last. Push for amortization over useful life at minimum, and exclusion of structural replacement.
- HVAC replacement versus repair. A tenant-favorable clause puts replacement on the landlord. A landlord-favorable clause puts replacement on the landlord only when the landlord's contractor determines the unit cannot be repaired, which leaves repeated repair costs with you. Know which version you signed.
- Administrative fee on CAM. Many leases add a management or administrative percentage on top of actual CAM. Ask what it is.
- Gross-up. In a partly occupied building, a gross-up clause calculates your share as though the building were more fully occupied. Reasonable in principle, expensive in practice. Understand the formula.
- Utility proration for unmetered service. Some leases prorate as the greater of your square footage share or a submeter reading, which means you never benefit from being the light user.
- Caps on controllable CAM. A cap on annual increases in controllable CAM, cumulative or non-cumulative, is among the most valuable things a tenant can negotiate and among the least frequently requested. Taxes and insurance are usually carved out as uncontrollable.
Which structure favors you
Choose gross or modified gross if you are a smaller tenant, your margins are thin, you need a budget number you can rely on, or your term is short enough that you would rather pay a premium than absorb volatility.
Choose triple net if you are taking a larger footprint or a longer term, you have the sophistication to audit reconciliations, and you want the benefit when operating costs stay flat.
- Ask about single net and double net too. Net terminology is used loosely. What matters is the list of costs, not the label.
Eight questions before you sign
What is total estimated occupancy cost per square foot, base plus all additional rent?
May I see last year's CAM reconciliation for this building?
Can capital expenditures be passed through, and are they amortized?
Is there a cap on controllable CAM increases?
Who replaces the HVAC, and what triggers replacement versus repair?
Is there an administrative fee on CAM, and at what percentage?
How is my proportionate share calculated, and is there a gross-up clause?
Are utilities separately metered?
Frequently asked questions
Is a triple net lease cheaper than a gross lease?
The base rent is lower. The total may not be.
What does NNN mean?
Net of the three: real property taxes, building insurance and common area maintenance, paid by the tenant on top of base rent.
Do Michigan industrial leases use NNN or gross?
Both. Larger single-tenant and bulk buildings lean triple net. Multi-tenant parks with smaller suites more often use modified gross or gross, because tracking pass-throughs across many small tenants is administratively heavy.
Can a small tenant negotiate a CAM cap?
Yes, and it is frequently granted, because landlords would rather concede a cap than a lower base rent. Ask.
What structure do your properties use?
Modified gross at all three, from $11.95/SF/YR at Rankin Business Park in Troy, $17 at Z Novi Commons and $20 at Northville Research Center.