A Guide To Different Types Of Commercial Leases

A Guide To Different Types Of Commercial Leases

Companies hoping to take out a commercial lease should be familiar with the process and the different types of leases available. Getting a lease isn’t simply a matter of calling a property company and signing a standard form. There are a lot of specific details that you need to know, depending on the nature of your business and what type of rental agreement you want.

There are several major categories of leases, and the primary difference between them is what percentage of operating expenses, utilities, etc tenants are required to pay on top of their rent. For each of the different types of commercial-leases, agreements are made between tenants and landlords about what exactly will be the tenants’ responsibility with regard to extra expenses. Let’s take a look at these lease types and what each of them entails.

Gross/Full-Service Lease

As the name suggests, gross (otherwise known as full-service) leases are leases that require the tenant to pay not only rent, but all of the fees involved. This includes taxes, insurance, maintenance fees, utilities, etc. Because all of these expenses are included in the rent, the rates tend to be higher than they would be if the tenant had to pay for each component separately.

Gross leases are popular among many types of businesses, particularly industrial and retail ones, because business owners don’t want to have to worry about juggling bills every month. And because rates are fixed, things such as electricity usage remain constant regardless of whether the tenant uses a lot of air conditioning in the summer, etc.

There is one thing that people should be aware of, though. Some gross leases allow for certain extra costs to be paid by the tenant after the first year of rental. Companies considering getting this kind of lease should read through the fine print carefully to make sure what the long-term conditions are.

Net Lease

As you’d expect, a lease that does not involve full payment of all expenses together is called a net lease. In general, net leases involve lower base rents than gross leases, although there are some fixed costs that the tenant must pay, including property taxes, common area maintenance, insurance, etc.

There are different kinds of net leases. In a “single” net lease, tenants are forced to pay utilities and part of their property taxes, with the rest being paid for by the landlord. There is also a “double” net lease, in which the tenant pays part of the property insurance, as well. In a “triple” net lease, tenants pay for part (or possibly all) of all these things, as well as common area maintenance.

In addition, there is something called an “absolute” triple net lease, in which tenants take responsibility for most of the necessary costs themselves, with the exception of some building repairs. This type of lease gives tenants the freedom to control their own costs, but also makes them responsible in the event of a major building problem.

Net leases are sometimes referred to as “N” leases. 

Modified Lease

There are also categories of “modified” gross and net leases. Both gross and net leases involve some degree of compromise between tenants and landlords, with expenses being paid for in a specific predetermined manner. In a modified gross lease, tenants usually pay for utilities and some percentage of operating costs. A modified net lease can involve a compromise between landlord and tenant of any of the above-mentioned net lease types.

Companies that foresee lower operating costs, for example, or perhaps lower utilities because of energy efficient electricity use, etc might consider getting a modified lease so that they are not subject to the usual rates imposed on tenants that generally incur higher costs with greater usage.

Absolute NNN Lease

An absolute NNN lease is the most black and white version of a commercial lease. In this type, tenants are forced to pay for all costs and maintenance themselves. It is essentially the same thing as the tenant owning the building, except that it is paid for on a monthly basis. For companies wanting complete independence in their activities, this type of lease would probably be preferable.

Percentage Lease

The final type of commercial lease is called a percentage lease. What this involves is the tenant paying a base amount for rent, plus some percentage of their revenue to the landlord. These types of agreements generally involve lower base payments because of the additional fees involved. The typical percentage required on a percentage lease is around 7%. This type of lease can be favorable to businesses not sure of what their revenue will be.

Most Leases Are Negotiable

As you can see, there are different types of commercial leases that businesses can choose from. Unless you are opting for an NNN lease, the type that you choose will usually allow for some degree of negotiation between you and the landlord. What you should do is familiarize yourself with the standards as much as possible in advance so that you get a good deal. You don’t want to set unreasonable expectations for yourself, and neither also do you want to end up getting shafted. 

Talk to experts in the field and find out what businesses similar to yours are choosing to do. If you do your homework in advance of the negotiation, you should end up making the right decision for your company.