OK class . . . I’ll take a stab at describing commercial lease terminology. I hope the information is helpful.
To begin with these are not legal terms but rather industry jargon utilized in marketing properties. Remember it is the lease document that formally defines landlord/tenant responsibilities in terms of which party provides what services and who pays for what and when.
Generally there are two ends to the spectrum here; the first is a gross lease where by the tenant pays an all inclusive rent and the landlord is responsible for all expenses. The other end of the spectrum is a net lease where the tenant not only pays rent but also pays for additional property expenses that are “passed-thru” to the tenant and/or reimbursed by the tenant. All of the other lease structures are a form of a gross or net lease or represent some hybrid in between. The following is a list of definitions for these terms based upon my combining information obtained from several sources (i.e. - Black’s Guide, BOMA, IREM, Appraisal Institute, general glossaries for real estate terms, etc).
Gross Lease: A lease in which the tenant pays rent out of which the landlord must pay all property expenses such as taxes, insurance, maintenance, utilities, etc.
Full-Service Rent: An all-inclusive rental rate that includes property operating expenses and real estate taxes. This term often is utilized in office leasing and differs from gross rent where by the landlord includes the cost for providing janitorial services within the tenant’s space.
Net Lease: A lease in which the tenant is responsible to pay, in addition to rent, certain costs associated with the operation of the property and common areas. These costs may include property taxes, insurance, repairs, utilities, and maintenance or various combinations thereof. In terms of property operating expenses the most common pass-thru categories include 1) property taxes 2) property insurance and 3) common area maintenance (CAM). The term “Triple Net” is based upon having the tenant reimburse the landlord for these property expenses. Other less commonly used terms include “double net” or “net property taxes” which reflect a subset of these pass thru items. The difference between these terms is the degree to which the tenant is responsible for operating costs.
Absolute Net: Lease requiring the tenant to pay in addition to base rent all costs associated with the operation, repair and maintenance of the building, (i.e. all real estate taxes, property insurance, utilities as well as repair and maintenance of the property inclusive of the building's structure, roof and site improvements). Often the tenant is directly responsible both for all such costs and for the active handling of these items themselves. Distinguished from a Net lease by tenant's responsibility for maintenance and repair of the building structure and roof and landlord frequently has no responsibilities under the absolute net lease, compared to a traditional NNN lease, whereby the landlord manages the property and is reimbursed by the tenant for operational expenses. Utilized primarily in single tenant situations.
Expense Stop – an amount which a property expense or a group of property expenses must reach prior to passing along a reimbursement amount to the tenant (i.e. the current amount must exceed a predefined limit for which the tenant is responsible for the portion that exceeds this predefined limit).
Base Year: – Utilized to define an initial amount for which various expenses or the total for a group of expenses that the tenant would be responsible for increases above this amount. Frequently reflects the initial fiscal year or the first year of the lease agreement.
Annual Caps – In leases whereby the tenant is responsible for increases in various expenses, annual caps set a limit on the amount of increase for which the tenant is responsible from the preceding year (i.e. 5% limit on property taxes).
