What Are The Different Types Of Commercial Leases?
At first glance, projecting the cost for renting space in a commercial building may seem pretty straightforward. Once you and your team decide on a commercial space to lease, you negotiate a cost and terms, sign on the dotted line, and move into the space. In reality, fully understanding a commercial lease requires attention to detail and help from a tenant broker. Who will be responsible for paying property taxes and insurance, you or the landlord? Who will pay for utilities? To discover the answer to those important questions, you need to know exactly what kind of commercial lease you are signing. Let’s review the different types of commercial real estate leases so you’ll know what to expect as far as cost and how to negotiate an agreement.
What is a Full Service aka Gross Lease?
Signing a full service lease (or gross lease) means you are responsible for paying the base rent. However, the landlord covers all the building expenses, including maintenance fees, insurance, and real estate taxes. When preparing to sign a full service lease, pay attention to how much the lease says you owe for common area maintenance. The landlord may regain his costs with “Load Factor” in the rent.
A net lease usually stipulates that tenants pay a portion (but not all) of the building’s operating expenses: maintenance fees, real estate taxes, and insurance. Types of net leases include triple, double, and single.
Triple Net Lease
A triple net lease is essentially the opposite of a gross lease. The tenant (you) agrees to pay for not only the fees for rent and utilities but also all of the commercial property’s operating expenses, such as maintenance fees, building insurance, and property taxes. Usually, triple net leases require reduced rental prices because the tenant has assumed responsibility for the operating expenses.
Double Net Lease
A double net lease requires the tenant to pay for the rent and utilities, as well as the property taxes and building insurance. However, the landlord pays for the building’s structural maintenance expenses. Landlords renting an office building to multiple tenants will likely divide the property tax and building insurance expenses fairly among the tenants.
Single Net Lease
A single net lease stipulates that tenants pay for rental and utilities as well as property taxes. The landlord would take care of building insurance and maintenance expenses. Be careful not to confuse a single net lease with a net lease. A net lease refers to a category of leases including single, double, and triple.
Modified Gross Lease
A modified gross lease occupies the middle ground between a gross lease and a triple net lease. In general, a modified gross lease means that the tenant pays base rent, utilities, and a portion of operating costs. The details vary from contract to contract. In some modified gross leases, tenants pay only base rent and utilities for the first year but in each additional year pay a pro rata share of the building’s operating costs. Their share of expenses would likely be based on the percentage of the building that they occupy. For example, a tenant occupying 50% of a building would be responsible for 50% of its operating costs.
Absolute NNN Lease
Sometimes people incorrectly use the terms “absolute NNN lease” and “triple net lease” interchangeably. They are not, however, the same. Usually, triple net leases require tenants to pay for some or all building repair expenses, but in some cases the landlord will assist with those expenses. Conversely, an absolute NNN lease delivers the landlord from all responsibility for the building in every case. That means the tenant must cover all building expenses, including any maintenance or repairs to the building’s roof and structure. This lease usually applies only to tenants with national or regional footprints and excellent credit.
Percentage rental leases require tenants to pay a base rent in addition to a percentage of business sales. Landlords often ask for seven percent. Be wary if one asks for 10 or 12 percent. Retail mall outlets typically have these types of leases.
Negotiation Tips and Exceptions
These commercial building leasing categories don’t represent absolute rules, though they can give you a general idea of what costs to expect for each one. Remember this: every contract is different, and every contract is negotiable. Read the fine print and review it with your broker and attorney before signing.
Commercial Lease Type Chart
|Lease Type||Expenses||Use Case|
|Gross Lease||You pay rent, the landlord covers all operating expenses but may recoup his costs with “Load Factor” in the rent.||Any commercial space|
|Modified Gross Lease||You pay rent + a portion of the building’s annual operating expenses; these contracts vary widely.||Any commercial space|
|Triple Net Lease||You pay rent + taxes, insurance, and maintenance fees.||Any commercial space|
|Double Net Lease||You pay rent + taxes and insurance.||Any commercial space|
|Net Lease||You pay rent + some degree of taxes, insurance, and maintenance fees. Types include single, double, and triple.||Any commercial space|
|Absolute Lease||You pay rent + all building expenses (taxes, insurance, maintenance), including roof and structure repairs.||Long-term leases to credit tenants|
|Percentage Lease||You pay rent + a percentage of your monthly sales||Retail space|
|Single Net Lease||You pay rent + property taxes.||Any commercial building space|
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Updated: January 2020