Decoding CRE - Understanding Lease Rates

When it comes to commercial real estate, understanding the rate per square foot is essential. But what exactly does that number represent? Is it just the cost of the physical space itself, or are there other factors at play? The truth is, the rate per square foot is made up of several components that combine to create the total rent. These different components include the base rent, operating expenses, taxes, insurance, utilities, building upkeep, etc. By understanding each of these pieces, occupiers can better understand what they’re paying for and ensure that they’re getting the most value for their money. 

Commercial real estate lease rates can be calculated in different ways, depending on the lease structure negotiated between the landlord and tenant. The most common types of CRE lease rates are full-service, modified gross, and triple net rates. Here are some key differences between these lease types:

Full Service Lease Rate Modified Gross Lease Rate   Triple Net Lease Rate
  • Often used for office space rentals.
  • Tenant pays a fixed monthly fee that includes all property operating expenses, including utilities, maintenance, taxes, and insurance.
  • Landlord is responsible for managing and maintaining the property.
  • Easier for tenants to budget, as they know the exact cost of rent each month.
  • Often results in higher base rental rates than modified gross or triple net rates.  
  • A hybrid between full-service and triple net leases.
  • Base rental rate includes some property operating expenses, such as, taxes, insurance, and maintenance, while the tenant pays for others, such as utilities and janitorial.
  • Typically used for office or retail space leases.
  • The exact expenses covered by the landlord vary by lease, so tenants need to review their lease agreement carefully.
  • Often results in lower base rental rates than full-service leases. 
  • Tenant pays a base rental rate plus all property operating expenses, including taxes, insurance, utilities, and common area maintenance
    (CAM) fees.
  • Landlord has minimal responsibilities for maintaining and managing the property (i.e. roof, HVAC units).
  • Typically used for industrial/ warehouse space leases.
  • Often results in lower base rental rates than full-service or modified gross leases.