The Low-Down on Commercial Real Estate Leases

The Types of Commercial Office Leases

Unlike residential leases, which tend to be fairly simple, commercial leases are a little complex. For those who have considered leasing commercial space, it is advantageous to know the different types of leases. Below is an outline of several types of common commercial leases.

Gross Lease (Full Service Lease)

In this all-inclusive arrangement, the landlord pays property taxes, insurance and maintenance on the property as well as the cost of utilities which the landlord pays. If a tenant goes beyond their projected utility uses, they may be charged extra to cover these costs. Janitorial services are sometimes included, although prospective tenants should inquire about this.

Many gross leases contain escalation clauses which allow the landlord to adjust the monthly rent based things such as increasing property taxes and rising maintenance costs. The great benefit of this type of lease is that it is easy for tenants because they pay one flat fee and don’t need to be concerned with servicing the property.

Net Lease

In contrast to the Gross Lease, in a net lease, tenants are charged less each month because the lease covers fewer items. The tenants pay a base rent plus a certain amount of ‘usual costs’ to cover building operations, maintenance and use. Usual costs are things such as real estate taxes, property insurance and CAMS (common area maintenance items). There are several types of Net Leases:

  • Single Net Lease (N Lease) – Tenants pay base rent plus a prorated portion of the property tax based on the proportion of building space leased by the tenant. Landlords cover additional building expenses while tenants pay utilities and janitorial services.
  • Double Net Lease (NN Lease) – Like the N Lease, tenants pay base rent plus a prorated portion of the property tax, a portion of the property insurance along with utilities and janitorial services. Landlords cover CAMS and costs related to structural repairs.
  • The Triple Net Lease – Tenants pay a fixed rent along with a significant share of the property’s operating expenses plus all taxes and insurance. Because the landlord’s costs are fixed, this type of lease is beneficial to landlords. Also, landlords need not bear the burden of tenants who waste utilities. However, some tenants do not like this type of lease as they bear a burden for operating costs, especially in older properties..

The Percentage Lease

Common in retail properties, tenants pay the base rent play a percentage of their sales volume. This percentage could be based either on monthly or annual sales. The percentage is paid only if a tenant reaches a predetermined sales threshold. For example, a merchant may be required to pay 7 percent of all sales over $25,000 in a month.

Modified Gross Lease / Modified Net Lease

Referred by both of these names, this type of lease is a compromise between the gross lease and the triple net lease. This lease allows landlords and tenants to set up terms that work for both parties. Rent is paid in a single sum and can include net costs like property taxes, insurance, and CAMS but usually no utilities or janitorial services. The specific ‘nets’ included in the lease depend on the terms of the lease.

This lease can be mutually beneficial to both landlords and tenants. For tenants, if net costs increase, their base rent doesn’t change. Additionally, with utilities or janitorial services not included, tenants can choose how they spend their money on these items. For landlords, if these expenses decrease, they save money.

Learn Before You Sign the Lease

When considering a commercial lease, it is important to know that there are different types,  some of which are better suited to certain types of businesses. Before signing a lease, make sure you understand the terms and conditions along with what is and what is not included in the lease.

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