Most Common Types of Commercial Leases Overview
It may be difficult to distinguish between different lease options provided by landlords if you are a tenant looking to lease commercial real property. Understanding the different types of leases and the details of each structure will help you budget your next commercial space.
It is important to evaluate space before you lease it. This difference in usable and rentable square footage should be taken into account.
There are three types of commercial leases:
Gross leases with full-service
Leases at a percentage
Net leases can be divided into two subcategories: double-net leases and triple net leases.
We provide an overview of each type of lease to help you understand its structure and determine which option is best for you.
Full-Service Gross Lease
A full-service or gross lease is the simplest form of a commercial lease. The landlord will charge the tenant a monthly gross lump sum. The monthly rental rate includes all property taxes and services such as insurance and maintenance. The rental rate includes all these costs, so a gross lease will cost more than similar properties.
Some gross leases exclude utilities and other tenant expenses. Tenants then pay separate rent. These agreements are known as "modified gross leasing." However, most gross leases require a single monthly comprehensive payment. In addition, many gross leases include expense caps that limit the tenant's share of included fees. The landlord will then bill the tenant for any excess. Some tenants prefer a gross lease because it makes expenses predictable.
Percentage of Lease
Most commonly, percentage leases are used for retail properties (especially shopping malls). Tenants pay a base rent and a portion of their gross sales when they operate a business in the building. This type of lease is ideal for tenants who wish to lower their rental costs while increasing their revenue.
Leases net
A net lease, which means "net of" or exempting certain expenses, is a lease structure in which the tenant pays monthly base rent and is responsible for specific building-related costs. Base rent is usually much lower than a gross lease because tenants have to pay their utilities, cleaning fees, and CAMs. Therefore, tenants should consider these costs and estimate their expenses in order to determine the total cost.
There are three types of net leases: Single-net, double-net, and the most popular, triple-net. Below, we'll discuss each type of net lease and the associated expenses.
Single Net Lease
Single-net leases, while not common, are a good option. Tenants pay a base rent and a pro-rated portion of the building's property tax. Tenants typically also pay for their utilities and janitorial services. The landlord covers all other expenses, including insurance premiums or CAM charges.
Double Net Lease
Double net leases are often listed as "NN" in the property listing. This is because they charge the tenant a base rental plus their share of property taxes and insurance premiums. In addition, tenants are responsible for paying their utilities and janitorial costs.
Common area maintenance fees are what the tenant doesn't have to pay for under a double-net lease. Common area maintenance fees can include equipment, supplies, and repairs to the lobby, restrooms, or stairwells. They also cover the salary of a security guard or lobby attendant. The landlord pays these expenses.
Triple Net Lease
Triple-net or "NNN" leases charge tenants a base rental. Tenants are responsible for their utilities and janitorial costs and their share of property tax, insurance premiums, and CAMs. Triple-net leases are often cheaper because the tenant is responsible for paying all associated costs. The most popular type of commercial lease is the triple-net. You can find a more detailed explanation of the NNN lease.
Triple-net leases can be beneficial to tenants because they allow them to cover their fair share of building costs. Some tenants may also save money if they use the space less than a gross lease. This lease type comes with some risks, as the tenant is responsible for all expenses. However, a net lease structure can be negotiated by tenants to set a ceiling on expenses, particularly if the building has been in use for a while and will need frequent repairs.
A "bondable" lease, or an absolute-net lease, is an uncommon form of lease that holds the tenant responsible for paying rent, expenses, and all repairs to the property. These items are responsible regardless of the condition of the building, including if it is condemned. This lease is most commonly used by landlords who have borrowed large amounts to finance the property. They also pledge rent money as security for the debt.
It doesn't matter which type of lease structure a building uses; it's still a contract. And contracts can be negotiated. There are many things to consider when negotiating a lease. You'll likely find concessions or trade-offs that result in a signed agreement and a friendly relationship that will last for the entire term of your multi-year lease. When negotiating and drafting lease terms for a property, tenants should consult a tenant representative broker or legal professional.
