NNN, Gross and Modified Gross Leases in Southeast Texas: What to Negotiate

Most commercial lease problems in Southeast Texas don’t come from the rent. They come from everything around it: who pays the property taxes when the appraisal district raises the value, who replaces the roof after a storm season, and what “common area maintenance” actually covers. If you’re leasing a storefront on Dowlen Road, a shop building in Lumberton or an office suite in Port Arthur, it helps to understand the main lease structures before you start comparing asking rates.

The three structures you’ll see most often

Triple net (NNN)

In a triple net lease the tenant pays base rent plus its share of the property’s three main operating costs: property taxes, building insurance and common area maintenance (CAM). The landlord’s rent is “net” of those expenses. NNN is the most common structure for retail centers, freestanding restaurants, single-tenant industrial buildings and most newer strip centers along the US 69 and I-10 corridors.

The quoted rate on an NNN space looks lower than a gross rate, so always ask for the current NNN estimate (sometimes shown as “NNN: $X.XX/SF/yr” on a flyer) and add it to base rent before you compare spaces.

Gross or full service

In a gross (or full-service) lease the tenant pays one rent figure and the landlord pays the operating expenses out of it. You’ll see this most in multi-tenant office buildings. Gross leases are easier to budget, but the landlord prices expected costs, and usually some cushion, into the rent. Many gross leases also have a base year or expense stop: if taxes or insurance rise above the first-year level, tenants pay their share of the increase.

Modified gross

Modified gross sits in between. A common local version: the tenant pays rent plus its own utilities and janitorial, while the landlord covers taxes, insurance and exterior maintenance. There is no standard definition of “modified gross,” so read the expense section line by line. Two leases with the same label can split costs very differently.

Why the structure matters more on the Gulf Coast

Two operating costs have moved a lot in this region in recent years: property insurance (wind and flood exposure) and property taxes (rising appraised values). In an NNN lease, both pass straight through to you. Before signing, ask the landlord for:

• The last two or three years of actual CAM, tax and insurance charges, not just the current estimate.
• The property’s current appraised value and tax account, which you can look up yourself on the Jefferson Central Appraisal District or Hardin County Appraisal District websites.
• Whether the building carries flood insurance and what its FEMA flood zone is. You can check the zone on the FEMA Flood Map Service Center or on our interactive property map.

Understanding CAM charges

CAM is where most disputes start. It usually includes parking lot upkeep, landscaping, exterior lighting, trash service, security and common-area utilities, plus a management or administrative fee. Points worth negotiating:

• A clear list of exclusions. Capital replacements (a new roof, a new parking lot, structural repairs), the landlord’s financing costs, leasing commissions and costs of correcting code violations that existed before your lease usually shouldn’t be in CAM. If capital items are allowed, ask that they be spread (amortized) over their useful life instead of billed in one year.
• A cap on controllable CAM. Many tenants negotiate a cap (for example, a fixed percentage per year) on increases in the costs the landlord controls. Taxes, insurance and utilities are usually excluded from the cap because the landlord can’t control them.
• A management fee limit. Ask how the fee is calculated and whether it is charged on top of taxes and insurance.
• Audit rights and an annual reconciliation. You pay estimated CAM monthly; at year-end the landlord should reconcile actual costs and credit or bill the difference. The lease should give you the right to review the records within a set period.
• Your pro-rata share. Your share is usually your square footage divided by the building’s leasable area. Confirm the denominator includes all leasable space, not only the space that is currently occupied.

Measuring the space

Rent is quoted per square foot, so the measurement matters. Office and retail landlords may quote “rentable” square feet, which includes a share of lobbies, corridors and restrooms, rather than the “usable” area inside your walls. Industry measurement standards are published by BOMA International. If the number on the lease looks larger than what you measure, ask how it was calculated and what load factor was applied.

Other terms worth negotiating

• Tenant improvement (TI) allowance and who builds out. Spell out the scope, the dollar allowance, what happens if construction runs over and when rent starts.
• Free rent or reduced rent during build-out. Common for longer terms, especially on second-generation restaurant or medical space that needs work.
• Repairs and HVAC. In many NNN leases the tenant maintains and replaces the rooftop HVAC unit serving its space. On an older building that can be a five-figure surprise. Ask for the unit’s age, a service report, or a cap on your replacement exposure.
• Use clause and exclusives. A broad use clause makes it easier to sublease or sell your business later. In a retail center, ask for an exclusive so the landlord can’t lease next door to a direct competitor.
• Renewal options and rent escalations. Fixed annual increases are common. Know the renewal rent before you invest in a build-out.
• Assignment and subletting. If you might sell the business, you’ll want the landlord’s consent “not to be unreasonably withheld.”
• Personal guaranty. Landlords often ask small-business tenants for one. Negotiate a cap or a burn-off after a period of on-time payments.
• Casualty and storm provisions. Who restores the building after hurricane or flood damage, how long they have, and whether rent abates while you can’t operate.

A few Texas rules to know

Chapter 93 of the Texas Property Code covers commercial tenancies. Among other things, it requires a landlord to refund a commercial security deposit, less lawful deductions, no later than the 60th day after the tenant surrenders the premises and gives a forwarding address. It also sets rules for when a landlord may change the locks on a delinquent commercial tenant; Section 93.002 lists those conditions. Leases often modify default remedies, so read your default section carefully, and have a Texas real estate attorney review any lease you’re unsure about.

Comparing two spaces fairly

To compare a gross space against an NNN space, convert both to an estimated total occupancy cost: base rent plus NNN or expense pass-throughs, plus utilities, janitorial and your expected maintenance. Multiply by the square footage and the term, then subtract the value of any free rent or TI allowance. The lower base rate isn’t always the cheaper deal.

If you’re looking for space, you can browse current commercial listings or use the property map to check flood zones, traffic counts and nearby businesses before you tour.

This article is general information, not legal or tax advice. Lease terms vary, so consult a qualified Texas real estate attorney before signing.

Header photo: Downtownbeaumont by R. Rothenberger, licensed CC BY 3.0, via Wikimedia Commons.