Ok, so you are looking to learn more about what types of commercial leases exist prior to making an informed decision for your business or coworking space. In this article, we will cover the the different types of leases and compare their differences.
What Is A Commercial Lease?
Unlike a residential lease, a commercial lease is an agreement between a renter (business) and landlord outlining the property strictly to for commercial or business use. Based on where the building is located, there are specific zoning requirements that dictate what type of business you can operate out of a specific area or space.
The Four Types Of Commercial Leases
Here is a breakdown of the different types of commercial real-estate leases and how they compare to one another:
- Gross Lease or “Full Service Lease”
- Modified Gross Lease
- Net Lease
- Percentage Lease
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Modified Gross Lease
Double Net Lease
Triple Net Lease (NNN)
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Gross Lease/Full Service Lease
Simply put, a gross or full-service lease includes all property operation expenses within the tenants base rent. Due to this, the base rent typically looks higher than other lease types because the landlord is responsible for covering the property costs out of the tenants rent.
What is included in a Gross Lease?
- Property Taxes
- Common Area Maintenance
Basically anything/everything to cover the building operations and maintenance.
Modified Gross Lease/Modified Net Lease
The modified gross lease is usually the most fair to both the landlord and tenant. Basically the fixed base rent and property operation expenses above are negotiated between the landlord and tenant.
Unlinke the gross lease, the net lease does not include the property operation expenses. In other words, the base rent appears lower but there are additional costs to help service the building and make it habitable.
Single Net Lease
Besides the base rent the tenant will pay the utilities, maintenance, and other related costs directly (rather than the landlord). To do this, electric or HVAC can be seperately metered to regulate specific costs per tenant. On top of the operation expenses the tenant will pay a portion of the property taxes that are to be negotiated.
Double Net Lease
The main differentiator between the single net lease and the double net lease is that the tenant pays both a portion of the property taxes and property insurance.
Triple Net Lease “NNN”
Following the same trend you may have guessed it. In a Triple Net Lease, the tenant usually pay for all or most of the taxes, insurance, and common area maintanance on top of the base rent. This is by far the most favorable for the landlord, as all costs associated with the buildings operation is covered by the tenant(s).
A percentage lease is when a commercial tenant pays a base rent and some percentage of their monthly sales. This typically allows the tenant to gain a reduced base rent in exchange for sharing their upside with the landlord. Since the lease is based on monthly sales this type of arrangement typically occurs with retail businesses.
When evaluating commercial lease options, it is important to focus on what expenses your business will be responsible for aside from base rent. As we outlined, NNN base rental rates and net leases tend to have much lower rental rates due to the fact additional expenses are added on top accounting for the actual cost of leasing a property. It is strongly advised that prospective business owners fully understand the type of lease they are getting into, as commercial leases tend to encompass big commitments of time and money.