What are The Different Types of Commercial Leases
By leasing business property, the landlord may use one of several types of commercial leases. Knowing how these leases differ from one another, tenants may feel more confident during the negotiations and will be able to plan their rental budgets better.
How does commercial leasing work? A commercial lease is a form of a contract made between a tenant - you and/or your company, and a landlord. It gives you the right to use the property for commercial purposes and activities for a set period of time. In return for this, you pay money to the leaseholder. Here, a lot of other questions appear. Who has to pay for the utilities and maintenance? Who is responsible for paying property taxes and insurance? These and other issues have to be considered, especially when it is a long-term commitment that costs a lot of money.
The benefits of different commercial lease types can vary, depending on the business type, location, and intentions of the proprietor. But, at the end of the day, both the landlords and tenants want to be in a “win-win” situation. Before you negotiate or sign an agreement, here is an outlook on the different types of commercial leases.
Gross lease | What it is
The gross lease is a basic leasing agreement, where the landlord bears responsibility for paying the expenses, such as:
- property maintenance;
- taxes;
- insurance;
- utilities.
The tenant is expected to pay a fixed sum of money for rental, and it covers all the necessary expenses. There are two subtypes of gross leases - full-service and modified gross. A full-service gross lease is popular among renters who occupy the office spaces in multi-tenant buildings. Because the landlord covers so many costs, the full-service lease is usually high, but it is the only fee for the tenant. In a modified gross lease, tenants typically pay a proportional share of operating expenses. The gross lease is one of the most common types of leases in commercial real estate.
Summary: Under the gross lease real estate definition we mean a type of the agreement where the tenant pays a flat sum of money and gets an all-inclusive and fully-operational workspace. The landlord pays all unforeseen costs out of that rent.
Net lease and its structure
Net lease is opposite to the gross one. It is an adjustable lease agreement for commercial space. The rent rates for commercial property are lower than that of the gross lease, but tenants also pay some other expenses, in particular - property taxes, insurance and operational fees. We can differentiate four types of net lease, which refer to the number of expense categories the tenant bears responsibility for.
- Single Net Lease or N lease. Under this lease, tenants are expected to pay a monthly rent, the cost of utilities, and one more fee related to the property tax (it should be discussed with the landlord). The landlords pay the building insurance and the fee for its maintenance. It is the simplest form of net lease.
- Double Net Lease or NN lease. This type requires a payment for rent, utilities, the property tax and insurance. The landlord takes over the cost of the workspace maintenance. Similarly to the other net leases, the main rent in the double lease is lower since the renter is responsible for additional expenses. Double net leases are often used in business centers. Generally, the property taxes and insurance rates will be proportionally distributed between all the tenants, depending on the amount of the square footage rented out.
- Triple Net Lease or NNN lease. One may easily admit that this type of lease is one of the most favorite among the landlords. The triple net lease in commercial leasing makes the tenant feel responsibility for the majority of expenditures, associated with rental.
- The Absolute NNN Lease. The fourth and the last type of net lease transmits all the financial responsibility to tenants. Unlike a triple net lease, where the landlords still pay some part of the office operational costs, the absolute NNN lease also predicts payments for the basic repairments of the workspace required, on top of the basic rent. Thus, the renters stay in a full control of the commercial building. Yet, if there is some catastrophe, they are also on their own. It is probably the most uncommon type of the lease.
Summary: Depending on the requirements, it is always possible to find the right type of net lease. Double, triple, and absolute net leases are typical to long-term contracts, while the single one is common among tenants who need a flexible office space. Net leases come in many forms, each of which offers a different layer of responsibility to tenants. The three main categories that define the amount of expenses are insurance, tax property and maintenance. A single net lease covers only one of these categories, a double net lease two, and so on.
Modified Gross or Modified Net Lease
What does a modified gross mean in a lease? This type is a so-called golden middle between the tenant and the landlord. It is rather similar to the full gross lease, but has one exception - it makes tenants responsible for the increases in the building’s operational costs during the period of time you will utilize the workspace, beyond the fees calculated in the base year of the contract. A modified gross lease is flexible and is tailored to the needs of both - the landlords’ and tenants’. The details vary from contract to contract, but you need to be careful and know exactly what expenses you and the landlord are responsible for.
Summary: The division of obligations between the leaseholders and tenants defines the nature of the modified gross lease. This type of contract is widely used and is suitable for any kind of commercial property.
Percentage Lease
A percentage lease is one of the most affordable and sought-after types of property leases. It involves a fixed rental cost and a percentage of the profits of a particular business that is renting the building. This percentage must be discussed by both parties in advance. Usually, the landlords ask for 7%, so be careful if you hear or see a higher figure. The property owner has to do his best to provide business with a workspace in a good location, whether it is a prestigious office space, a retail unit in a vibrant shopping area or a restaurant in a pedestrian zone. The revenues, the landlords get, depend greatly on how they will manage to draw clients, and to what extent their properties will cover the tenants’ needs.
Summary: The percentage lease is common to short-term leasing contracts, and startups. It is also suitable for renting shops and premises for accommodating restaurant businesses. If your business depends on the seasonal income, this type of lease may help you save on the rental budget during the period of time, when you earn less. A significant advantage of the percentage lease is that it typically offers lower base fees than a standard one, while a tenant agrees to pay a portion of the sales’ income.
Variable Lease
There is one more type of the leasing contracts that changes in accordance with the certain conditions, and it is called the variable lease. It is subdivided into the index lease and the graduated lease. Often, different types of commercial lease agreements are dependent on the external factors, like the CRE market conditions, rental schedules, and others. You may negotiate a yearly rent review with the landlord based on the average office rental cost in a particular location. If you choose a graduated lease, the rental cost increases according to the previously arranged schedule. The increases in payments can be arranged seasonally, which is quite common to the tourism industry and thosebusinesses that operate in the large urban centers.
Summary: If you want to stay flexible in your rental budget, the variable lease is one of the most appropriate solutions. Run negotiations with the landlord to adapt your expenses to the circumstances and location you have chosen to accommodate a company.
Renting commercial premises | Need help?
Each tenant and landlord wants to have a deep understanding of what to know before signing a lease. It is important to consider the rental budget and expenses appropriately so that each part knows what it is responsible for. Each type of commercial lease has its pros and cons, each comes with its own advantages and drawbacks. The landlords can learn much about the tenants’ intentions by analyzing the lease type chosen by them. The tenants should read the leasing agreement carefully before they put a signature.
MatchOffice is an experienced commercial property agent that will help you find the property with the appropriate lease type that is in your best financial interests. We are proud to become your partner in the leasing and rental processes, having over 15 years of experience in the CRE industry all around the world. Don’t hesitate to contact us now and learn as much as possible about our brokerage services.
