Why the Office Market Should Turn to Triple Net Leases
Class “A” office space in Huntsville and Birmingham has become synonymous with a “Full Service Gross” rate, meaning that all of the services, common areas maintenance, janitorial, and utilities are included in one rate paid to the landlord on a monthly basis. For many years this has been the case in the marketplace because it seems simpler and attracts tenants to the idea of a truly full service experience.
Having spent recent time in review of larger cities, many operate class “A” buildings on a triple net lease rate. This lease rate is simply a base rate inclusive of the rent. The rest of the services, the common area maintenance, janitorial, utilities etc. are paid separately. While in our market this is not typically seen in office space and more in industrial or retail, there are many benefits of a NNN lease type that it would behoove the market to adopt.
- More control of expenses for tenants – Office tenants want to know exactly what their overhead is. One of the ways to fine tune this is to pay for exactly the services you are using. This allows tenants to adjust their usage of say, utilities, or reduce the amount of times their office is cleaned by a custodian per week if they notice the costs increasing by the month. Being able to closely monitor what is going out, rather than relying on estimates provided by a Landlord, is a way to reign in expenses and pay for what you are actually losing.
- Less accounting headaches – This applies to both a Landlord and a Tenant. While one flat rate may be charged in a full-service lease type, the rates are based on estimates of what the operating expenses will cost on a particular building. If the operating expenses were considerably higher than what was estimated, the Tenant will still be on the hook for the expenses at the end of the year in most leases through either an expense stop or a base year scenario. Calculating and billing these pass-throughs can be a headache for Landlords, and the uncertainty or lack of planning can be an issue for a Tenant.
- Lower commissions paid by landlords – While this is not a popular sentiment among many of my colleagues, who make a living off of leasing space, and seems counterintuitive to me, the fact is that NNN leases typically will have lower commissions paid to brokers as the brokers are paid only on the rental rate. If the operating expenses are added into this rate such as on a full service lease type, the brokers are being paid for more than the true rent.
While there are positives to our current market conditions, my recommendation to many Landlords going forward to is to look at executing new leases under a triple net arrangement, and for Tenants to keep an open mind when reviewing their leasing options.
James Lomax is a Commercial Real Estate Broker with Colliers International in Huntsville, Alabama. He can be reached at 256.503.6088.
CCIM 4Q19/1Q20 CRE Insights Report