Shayla Mars
Freelance Writer, VTS
Commercial real estate leases can seem daunting, especially since they’re a long-term commitment that can cost a lot of money.
But, they’re not as complicated as many think. There are three categories of leases when it comes to commercial real estate: Gross Lease (also known as Full Service Lease), Net Lease, and Modified Gross Lease. The main similarity among these leases is that they all provide a base rent with variations around who pays for which operational expense.
Here's a breakdown of the different types of commercial real estate leases, and what they mean for both tenants and landlords:
1. Gross Lease/Full Service Lease
In a gross lease, the tenant’s rent covers all property operating expenses. These expenses can include, but aren’t limited to, property taxes, utilities, maintenance, etc. The landlord pays these expenses using the tenant’s rent to offset the costs. As a result, the base rent is typically relatively high, but is the only cost to the tenant.
Tenants tend to prefer this type of lease because they don’t have to get involved in the day-to-day operations of the building the rent is fixed, even if the expenses aren’t. For example: during the summer, rent will remain the same even though air-conditioning use increases electricity costs. This lease is typical for industrial, retail and office freestanding properties.
Many landlords try and include some variable cost flexibility in the lease by adding “escalation clauses” that account for an increase of insurance or taxes. They can also include language that allows them to temporarily increase your rent based on variable costs. Using the same air-conditioning example, you would receive an increase in your next month’s rent or a bill to cover the cost of use from the previous month.
2. Net Lease
The net lease is a highly adjustable commercial real estate lease. The base rent for a net lease is lower than a gross lease, but the tenant also pays fixed operating expenses such as property taxes, insurance, and common area maintenance (CAM) items. There are four types of net leases:
Single Net Lease:
In a single net lease, tenants pay a set rent and a piece of the property tax (which would be negotiated with the landlord). The landlord then pays building expenses, while the tenant pays utilities and other services directly.
Double Net Lease:
A double net lease is similar to the single net lease, except the tenant also pays a piece of the property insurance along with the property tax. The landlord takes over paying for maintenance of the common area, but the tenant is still responsible for his or her own utilities and garbage services.
Triple Net Lease:
The triple net lease encompasses property taxes, insurance, and common area maintenance, with the tenant paying for some or all of the cost of these three things on top of their base rent. It is one of the most common lease types.
This lease structure is definitely favorable to landlords, but that doesn’t mean it’s benefits for the tenant. The lease does give tenants the ability to review the landlord’s operating expenses, and all savings go directly back to the tenant.
Absolute Triple Net Lease:
This is the triple net lease magnified. The tenant takes on all costs enabling them to have sole responsibility of the building. It might just be better to purchase a freestanding building out right. The benefit in this lease is that as the tenant you can virtually own a building without buying it; however, if there is a catastrophe that destroys the property you are on your own. This is probably the most uncommon commercial real estate lease.
3. Modified Gross Lease/Modified Net Lease
The third major type of commercial real estate lease is the modified gross lease (or modified net lease) and offers a happy middle ground for both tenants and landlords. The modified gross allows a broader range of negotiations when it comes to operating expenses. The base rent will then be subjected to the terms agreed upon by both parties like the gross lease. The differentiating factor is that the lease rate remains fixed even if costs increase or decrease.
Shayla Mars is a freelance contributor to VTS. Her work has previously been featured in Huffington Post Business Blog, MyBankTracker.com, and more.
FAQs
Exploring what are the 3 main types of lease agreements
| Type | Duration | Ownership of Asset |
|---|
| Operating Lease | Short-to-Medium | No (Lessor) |
| Finance Lease | Long Term | Yes (Lessee) |
| Sale and Leaseback | Depending on Agreement | Yes (Lessor, then Lessee) |
1. Gross Lease. Gross leases are most common for commercial properties such as offices and retail space. The tenant pays a single, flat amount that includes rent, taxes, utilities, and insurance.
What are options in a commercial lease? ›
“Option” shall mean: (a) the right to extend or reduce the term of or renew this Lease or to extend or reduce the term of or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal or first offer to lease either the Premises or other property of Lessor; (c) the right to purchase, the ...
Which commercial lease is best? ›
Triple net leases are commonly found in commercial real estate. They usually tend to have lower rents because the tenant assumes ongoing expenses that would otherwise be the landlord's responsibility. Triple-net leased properties have become popular with investors because they provide low-risk, steady income.
What does nnn stand for in commercial real estate? ›
A triple net lease (triple-net or NNN) is a lease agreement on a property where the tenant promises to pay all expenses, including real estate taxes, building insurance, and maintenance.
What is the most popular type of lease? ›
Triple Net Lease:
The triple net lease encompasses property taxes, insurance, and common area maintenance, with the tenant paying for some or all of the cost of these three things on top of their base rent. It is one of the most common lease types.
What is the best commercial lease for a landlord? ›
Compare Commercial Lease Agreements
Gross leases tend to benefit the tenant, whereas net leases are more landlord friendly. In a gross lease, the tenant has more control over how much is spent on such expenses as janitorial services and utilities.
What are the two major classifications of leases? ›
The two most common types of leases are operating leases and financing leases (also called capital leases).
What is a main commercial property type? ›
The simplest way to define commercial real estate is a property that has the potential to generate profit through either capital gain or rental income. Examples of commercial property spaces include office buildings, residential duplexes, restaurants, or even a warehouse.
What are the four primary leases? ›
Most authorities classify leases into four categories, based on the lease term: Estate for years; Estate from period to period (periodic tenancy); Estate at will; and Estate at sufferance.
What is a Break Option Clause? When looking at what a break option clause means - they allow one party to terminate the lease agreement before the end of the natural term.
What is the difference between commercial lease? ›
Commercial leases are understandably longer term and much more complex than residential leases, and are more binding since the landlord usually invests some capital in preparing the property for the tenant.
What is the most used commercial lease? ›
A triple net lease, sometimes known as an NNN lease, is the most common type of commercial lease. A triple net lease is a lease whose monthly rent fee does not include operating expenses. Typical operating expenses include insurance, utilities, property taxes and maintenance costs.
What is the normal length of a commercial lease? ›
Lease durations can range from 1 day to 999 years. The specific term, usually between 1 and 25 years, is mutually agreed upon and legally binding, often spanning 1 to 3 years. Modern business owners often prefer short-term commercial leases due to their increased flexibility, with shorter lease terms.
What kind of commercial tenant is most likely to have a percentage lease? ›
Percentage leases are most often used with retail tenants. Multi-tenant retail properties, such as malls and shopping centers, use this type of lease because it benefits both parties involved.
What is the most common lease? ›
A triple net lease, sometimes known as an NNN lease, is the most common type of commercial lease. A triple net lease is a lease whose monthly rent fee does not include operating expenses. Typical operating expenses include insurance, utilities, property taxes and maintenance costs.
What type of lease is best for a landlord? ›
A fixed-term lease is great for landlords and tenants because they both can predict and rely on the fixed rental cost every month. It's still possible to cancel a fixed-term lease, however, the tenant may end up paying a penalty for breaking the agreement.
What is the simplest type of lease? ›
Gross Lease: A gross lease, also known as a full-service lease, is one of the simplest types of commercial leases. With these leases, the tenant agrees to pay a fixed monthly rent and the landlord covers all operating expenses like property taxes, maintenance, utilities, and insurance.
