Triple Net (NNN) Lease Structure
The triple net lease — by far the most common structure in Metro Vancouver industrial real estate — separates base rent from operating costs. The tenant pays base rent (quoted as $/PSF net) plus operating costs (taxes, maintenance, insurance) plus tenant-specific costs (utilities, janitorial, internal insurance). Operating costs are typically reconciled annually based on actual landlord expenses. The structure provides cost transparency and aligns incentives — tenants benefit from operating efficiency improvements; landlords pass through actual costs without margin.
Modified Gross Lease Structure
Modified gross structures fold some operating costs into the rent quote while passing through others. Common variations include rent that includes property taxes and insurance but excludes utilities and tenant-specific costs, or rent that includes a base year operating cost with escalations for increases. Modified gross is more common in smaller industrial spaces and flex industrial. The structure simplifies tenant budgeting but transfers some operational risk to the landlord.
Full Gross Lease Structure
Full gross leases — where the landlord pays all operating costs from the rent collected — are rare in industrial real estate. They appear occasionally in smaller flex industrial or short-term lease arrangements. The structure simplifies tenant budgeting but exposes the landlord to operating cost inflation and reduces tenant incentive for operational efficiency. Most institutional industrial leases use NNN structure for cost transparency and risk allocation.
Understanding TMI (Taxes, Maintenance, Insurance)
Operating costs in Canadian commercial real estate are often referred to as TMI — taxes, maintenance, insurance. The components vary by building and management structure but typically include property taxes (largest component, often 60 to 70 percent of TMI), building insurance, common-area maintenance (snow removal, landscaping, parking lot maintenance, exterior repairs), and management fees. Modern Class A buildings with full property management run higher TMI than older self-managed buildings. TMI typically escalates annually based on actual landlord expenses.
Modeling Total Occupancy Cost
Total occupancy cost equals base rent plus operating costs plus tenant-specific costs (utilities, internal insurance, janitorial). For most industrial operators, total occupancy cost is the relevant figure for budgeting and comparing alternatives. Lease quotes on a net basis can be misleading — a $15 PSF net lease with $9 PSF TMI carries the same total occupancy cost as a $19 PSF net lease with $5 PSF TMI. Comparing alternatives requires modeling on a total occupancy cost basis with consistent assumptions about op-cost.
Negotiating Operating Cost Provisions
Operating cost provisions in industrial leases include several negotiation levers. Capital expenditure provisions — whether and how landlords can amortize major repairs through tenant op-cost — affect long-term cost. Operating cost caps limit annual increases and protect tenants from runaway costs. Audit rights allow tenants to verify the accuracy of operating cost calculations. These provisions should be negotiated alongside rent; smaller leases often accept boilerplate provisions while larger leases routinely negotiate meaningful tenant protections.