3 Types of Commercial Leases

Leases are calculated around two main methods: “Gross” and “Net”. A gross lease usually means the tenant pays one lump sum for rent, which the landlords uses to pay his expenses. However, the net lease has a smaller base and the tenant pays for his expenses.

Full Service or Gross Lease

  • Gross leases are all-inclusive. The landlord pays all or most expenses associated with the property, including taxes, maintenance, insurance, utilities, janitorial, etc. from one payment.
    • The tenant pays his own property insurance and taxes.
    • The primary benefit is the ease for the tenant in paying and the ability to forecast expenses without worrying about varying costs.

Net Lease

  • The net lease has a lower base, plus some or all of the other expenses associated with maintenance, operations, and use that the landlord occurs. These might include real estate taxes, property insurance, and common area maintenance items (CAMS).
    • CAMS include sewer, water, trash, janitorial services, property management fees, landscaping, parking lots, fire sprinklers, and any commonly shared area or service.
  • Types of Net Leases
    • Single Net Lease (N Lease)
      • Tenant pays the base rent plus a proportional (pro-rata) share of the building’s property tax. The landlord pays all other building expenses. Tenant pays utilities and janitorial services.
    • Double Net Lease (NN Lease)
      • Same as the single net with the addition of paying the pro-rata share of the property insurance.

 

  • Triple Net Lease (NNN Lease)-(Most common net lease)

 

    • Tenant pays all or part of three ‘nets’: insurance, property taxes, and CAMS over and above the monthly base rent. Common area utilities and operating expenses are usually included. Tenant pays all costs of their own occupancy.
    • Landlords usually estimate expenses and charge the tenants their pro-rata share.
    • NNN Leases are thought to be more landlord-friendly, and tenants should ensure they understand NNN fees and negotiate caps on the amounts billed annually. An NNN lease can vary monthly and yearly as building expenses ebb and flow. This can cause a company’s expense forecast to be difficult to determine.
    • Tenant benefits include transparency since tenants are aware of building expenses in proportion to what they are charged. Costs savings in operating expenses can be effected by the tenant and passed on to them as savings. Furthermore, the NNN lease can be more affordable as the tenants have a higher degree of responsibility for the building.

Modified Gross Lease

  • While the net lease leans to be more landlord-friendly, and the gross lease is more tenant-friendly, the modified lease is a compromise between the two. In the modified gross lease (or modified net lease), the tenant pays one lump sum for a portion or all of the “nets”. Janitorial and Utilities are often excluded from the rent and paid by the tenant. All the “nets” are negotiable for which are included in the base rental.
  • The flexibility of this lease makes it popular with tenants. In contrast to the NNN lease, changes in the expense of insurance, taxes or CAM charges remain constant.

Tenants must read the leases carefully in order to understand the expenses for which they are responsible. Caps should be negotiated where additional charges may occur. While the base rate may vary based on the lease type, market forces will tend to even out the rental rates for comparable properties even with different rental spaces in the same area.