The process of renting a commercial building may seem straightforward to those who have never done it. Some business owners assume that once he or she has decided what space to lease, it’s just a matter of negotiating the terms, signing on the dotted line, and moving in. In reality, things aren’t quite that simple. There are actually many different types of commercial leases and business owners need to know what each of them entails so they can know what they are signing. Read on to find some basic information about eight types of commercial real estate leases.
Table of Contents
Gross Leases
Gross leases, also referred to as full-service leases, require renters to pay only the base rent. The landlord will cover 100% of the building expenses, which typically include insurance, real estate taxes, and basic maintenance fees. They are common in commercial real estate. Business owners offered this type of lease should take a look at how much he or she will owe for common area maintenance, as this is where landlords often regain their costs spent on other services.
Net Leases
Net leases stipulate that tenants must pay some of the building’s operating expenses, including real estate taxes, insurance, and maintenance fees. The landlord will cover the rest. There are actually three types of net leases, each of which divides responsibility for operating expenses differently.
Triple Net Leases
These leases are basically the opposite of a gross lease. Tenants agree to pay all of the building’s operating expenses. The trade-off is that most triple net leases have reduced rental prices to help make up for the fact that the tenant or tenants assume all responsibility for ongoing operating expenses.
Double Net Leases
With double net leases, tenants are not responsible for 100% of operating expenses, nor are landlords. Landlords pay for things like structural maintenance, while tenants pay for utilities, property tax, and insurance. Double net leases are common in shared office buildings, where landlords typically divide real estate taxes and insurance expenses so that all tenants are responsible for paying an equal part.
Single Net Leases
Single net leases require tenants to utilities and property taxes, but not insurance and maintenance expenses. As with double net leases, the responsibility for paying the real estate taxes is typically divided equally among tenants in shared commercial buildings.
Modified Gross Leases
Modified gross leases vary substantially from contract to contract, but what all of them have in common is that they sit somewhere between gross leases and triple net leases. Tenants always pay the base rent, almost always pay the utility bills, and typically pay some portion of the building’s ongoing operating costs. The terms of modified gross leases may vary from year to year.
Absolute NNN Lease
Absolute NNN leases are similar to triple net leases, but they’re not the same. With triple net leases, landlords often assist with building repairs, but with absolute NNN leases, the landlord is completely absolved from all responsibility for the building.
Percentage Leases
Tenants with percentage leases pay a base rent and a percentage of business sales. Seven percent is the norm, but some unscrupulous landlords charge as much as 12%. These leases are common in retail.
The Bottom Line
Don’t assume that all commercial leases are largely the same. Find a landlord who offers not just affordable base rent, but also good terms.
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