Types of Commercial Real Estate Leases

In commercial real estate,leases are grouped into three main categories depending on the type of rent calculation method(s) used: “gross” or “net.” In a nutshell,a gross lease requires the tenant to pay a pre-determined base rent while the landlord takes care of the other operational expenses of the building. The net lease requires the tenant to pay all or some of the building expenses in addition to the monthly base rent. The third and final type of lease is the modified gross lease- a combination of both the net lease and the gross lease.

It is worth noting that the terms and conditions for each type of lease can vary greatly from one building to another so it’s important that you consult with a commercial leasing company such as https://austintenantadvisors.com/. However,the basic concept for each remains the same. Below is a detailed overview of all three main types of leases to help you make an informed decision when negotiating a commercial lease for your business.

Gross Lease or Full Service Lease

A gross lease has been likened to renting a home whereby the landlord assumes the responsibility of paying for all or some of the expenses associated with the house including property taxes,maintenance costs,and insurance among other things. It is an all-inclusive type of agreement which means the tenant’s only responsibly is paying the agreed-upon monthly base rent. As a result,the base rent is usually higher in a gross lease than what you’d expect in other types of leases.

When negotiating this type of lease,you should fully understand the kind and frequency of maintenance services provided and the extent to which the landlord is required to pay for certain expenses. For instance,there might be a limit to the use of certain utilities beyond which the tenant is expected to pay for the extra costs incurred.

Due to its simplicity,the gross lease is very popular among commercial tenants: it gives them time to concentrate on improving their business while the landlord is left worry about all the expenses associated with running the entire building.

Net Lease

With a net lease,the tenant(s) is charged a relatively lower monthly flat-rate and is in turn tasked with paying all or some the operating costs for the commercial space including property insurance,common area maintenance fees,real estate taxes,janitorial services,utility bills,trash collection and so on. The net lease can be broken down into four sub-categories as discussed below:

  • Single Net Lease (N Lease)

The Single Net Lease requires the tenant to pay a monthly base rent plus a pro-rated share of the property tax. The tenant is also required to cover the utilities and janitorial services. The remaining expenses become the landlord’s responsibilities.

  • Double Net Lease (NN Lease)

The Double Net Lease is very similar to the Single Net Lease with the only exception being that the tenant is expected to pay a proportionate share of the property insurance on top of the monthly flat rate,and the property tax. The landlord’s responsibilities are hence reduced to structural repairs and common area maintenance (CAM).

  • Triple Net Lease (NNN Lease)

The Triple Net Lease is very common in retail spaces and freestanding commercial buildings. In this type of lease,the tenant assumes virtually all the responsibilities and expenses associated with running the business and maintaining the building on top of the monthly base rent. This includes insurance,CAM,property taxes,utility bills,and all other occupancy costs that business incurs.

If the building has several tenants,the landlord will estimate the total expenses and then charge each tenant a fee that is proportional to their leased space. For instance,if you lease a 10,000 square feet of retail space from a 50,000 square foot building,you will be accountable for 5% of the building’s insurance,taxes,and CAM fees.

In most cases,the triple net lease tends to favor the landlord more than the tenant. As such,you should be very careful when negotiating an NNN lease. Another downside to triple net leases is the unpredictable fluctuations in monthly operating costs which makes it almost impossible to project the company’s overall expenditure.

On the upside,there is a lot of transparency when it comes to the NNN lease: you can easily compare the business’ operating expenses and the overall rental requirements. Also,the monthly base rent is significantly lower since the tenant is taking up all the other responsibilities.

  • Absolute Triple Net Lease

Although not very common,the absolute triple net lease is an inflexible and more binding version of the triple net lease. This type of lease dictates that the tenant(s) is responsible for all conceivable real estate risks associated with the building. For instance,if a commercial building is condemned after you have entered into a lease agreement with the landlord,you will continue paying the rent until your lease has expired. The lease would also require the tenant to shoulder all the re-construction expenses in case the building is destroyed by,say,a natural catastrophe. Due to its inflexible nature,the absolute triple net lease has been dubbed the “hell-or-high-water lease.”

Modified Gross Lease

As mentioned earlier,the modified gross lease is a combination of both the gross lease and the net lease and is sometimes referred to as the modified net lease. This type of lease has gained a lot of popularity in commercial real estate because it strikes a compromise between the tenant-friendly gross lease and the landlord-friendly net lease. Just like in the gross lease,the tenant pays a pre-determined monthly base rent plus a negotiable share of the real estate taxes,insurance and common area maintenance fees in a lump sum. Personal expenses like utility bills and janitorial services are left to the tenant which translates to more control over your expenditure. Unlike the triple net lease,fluctuations in monthly operating costs do not affect the lease rate.

Summary of Modified Gross,Triple Net,and Full Service Commercial Leases

If you are in the market for a commercial office space for lease,you need to diligently evaluate your options. Remember to take into consideration the different types of leases at your disposal while paying a lot of attention to the overall expenses as opposed to the monthly base rents: most leases with low monthly base rents like the triple net lease tend to carry a lot of additional expenses and responsibilities.

Although the terms and conditions for different types of leases vary greatly from one building to another,market forces have a way of balancing out the rental rates for similar commercial properties. This means that when using a gross lease,a modified gross lease,or a triple net lease,you can expect to pay approximately the same amount with other tenants leasing similar quality commercial spaces in your area.

The most important tip to remember about commercial leases is you have to read and understand what is expected of you as a tenant. If you are not comfortable with any of the terms or conditions,you can negotiate a better deal that will favor the growth of your business.