Are you a tenant renting a commercial space? Perhaps you’re the owner of a commercial space planning to embark upon leasing the property. Either way, having a basic working knowledge of the most common types of commercial leases will be very beneficial for you—and the party on the other side of the deal. Did you realize that there are different types of commercial lease agreements? It’s true—there’s not a one-size-fits-all package when it comes to commercial real estate investment.
Brush up on the basics of gross, percentage, and net leases. Additionally, net leases actually have two subcategories—double net leases and triple net leases, which we’ll also cover.
Gross leases are often referred to as “full-service” leases. In short, the landlord charges the tenant a monthly gross amount. The landlord is responsible for paying property taxes and services for space.
This includes things like insurance, maintenance issues, and other expenses common for the area. Sounds simple, right? Reread that last part. Even though the landlord assumes the responsibility for paying the bills for the property, that really translates to writing the checks.
Many times, depending on the wording in the lease, the tenant may actually be the one providing the funds for these payments, and the landlord is simply making sure the proper parties receive the money.
If you are the tenant (or prospective tenant) in the arrangement, be sure to check for this type of language, or hidden charges, which are often coined as, “the load factor.” Be clear about any hidden charges upfront.
The majority of gross leases simply charge that one lump sum—hidden charges or not. This is a situation that some businesses feel comfortable with because they like knowing exactly what amount to be expecting each month, with no surprises.
However, there are also times when a gross lease can be adjusted to exclude charges such as utilities, etc., which means they become the financial responsibility of the tenant each month for the duration of the lease.
These adjusted gross leases are called “modified gross leases,” simply because they have been changed from the typical type of gross lease transactions.
Percentage leases are commonly used in retail shopping centers or malls. These types of lease contracts consist of the owner charging their tenants a base amount for rent, in addition to a portion of the business’s gross sales that are made in the building.
Tenants often find this type of lease favorable, because they know exactly what amount they’ll have to pony up each month. The charges only rise if their profits do as well. They’ll never be paying more when losing money or not reaping as much in sales.
Next up are net leases. In a net lease deal, tenants are charged a base amount in addition to various building-related expenses.
Although an attractive point of a net lease may seem to be that the base amount charged is a great deal less than what would be charged in a gross lease, that attractiveness dulls its shine as the “net” expenses gradually increase.
Basically, you’re enjoying a smaller payment for a shorter amount of time, until the total payment continues to increase.
The single net lease arrangement is when the tenant is charged a base rent plus their prorated portion of the property tax, as well as being responsible for utilities and janitorial/cleaning services. In a single net lease, the landlord is responsible for all other charges.
Single net leases may seem pretty straightforward, but let’s not forget about double net leases and triple net leases. In a double net lease, tenants can expect to pay base rent, their share of property taxes, AND insurance premiums. In addition, tenants are responsible for shelling out the bucks for their utilities and whatever janitorial services are used.
When browsing commercial properties for rent, look for the “NN” signage. This signifies a property with a double net lease. So, is there anything the tenant in a double net lease doesn’t have to foot the bill for?
Some things that the landlord pays for include building security officers or attendants, maintenance of common areas such as lobbies, elevators, or restrooms, and other equipment or supplies. Paying for these common area expenses is referred to as CAMs—Common Area Maintenance fees.
Triple net leases are signified in listings by—you guessed it—the “NNN” signage. In this last type of net lease that we’ll review, tenants are charged their base rent, utilities, janitorial services, AND their share of items such as property taxes, insurance premiums, and those CAMs we discussed in double net leases.
Occasionally, a tenant may also be held liable under an uncommon variation of a triple net lease, called an “absolute net” lease.
This means that the tenant is responsible for continuing to pay their rent despite the building’s condition. They may also be held responsible for paying to rebuild the property in the event of natural disaster destruction.
Why would a landlord utilize this type of (rare) lease agreement? Absolute net leases are usually employed when the landlord is not in the best position financially, perhaps being in debt or having borrowed a great amount to finance the property. They may use the high rent amount as payment toward their debt.
Triple net leases, on the other hand, are very common and need to be reviewed carefully by potential tenants. A helpful hint when examining a triple net lease is to try and negotiate a cap on expenses with the landlord. Acquire as much information as possible about the current condition of the building.
No matter what type of commercial lease you end up being confronted with, keep in mind that there is always room for negotiation. A landlord’s willingness (or lack thereof) to cooperate with you on the front end may be a sign of things to come.
The clearer and more transparent the details are in the beginning, the more likely a seamless leasing relationship will transpire.