Understanding the different types of commercial leases is crucial for both landlords and tenants. It's a step you don't want to skip. A commercial lease agreement is the foundation of the landlord-tenant relationship. It lays out all the rights and responsibilities, directly impacting your business's financial health and operational stability.

Before signing a lease, you must understand all the terms and conditions involved. This knowledge allows you to negotiate better terms and create a mutually beneficial agreement.

Table of Contents:

• Key Commercial Lease Types Explained
  • 1. Gross Lease
  • 2. Net Lease
  • 3. Modified Gross Lease
  • 4. Percentage Lease
• Conclusion

Key Commercial Lease Types Explained

You'll find several different types of commercial leases in the market. Each comes with its own set of advantages and disadvantages for both landlord and tenant. Carefully considering your business needs and financial situation when choosing a commercial lease type is important.

1. Gross Lease

Often found in office buildings and retail spaces, gross leases provide a simple, all-inclusive rental arrangement. In this setup, you pay a single, fixed monthly rent that includes various costs like property taxes, insurance, and maintenance.

This appeals to tenants who prefer predictable expenses and minimal involvement in building operations, simplifying financial planning and accounting.

Benefits of a Gross Lease:

• Predictable Expenses: With a fixed monthly rent, you can accurately budget for your expenses, ensuring financial stability.
• Simplified Accounting: No need to keep track of multiple bills. A single rent payment covers everything, making accounting straightforward.
• Minimal Landlord Responsibilities: You aren't involved in the nitty-gritty of property management, giving you more time to focus on your business.

Considerations for a Gross Lease:

• Potentially Higher Rent: While the all-inclusive nature is convenient, this convenience often translates into higher rent to compensate the landlord for the expenses they cover.
• Limited Control Over Operating Expenses: You have little control over the costs of property taxes, insurance, or maintenance, even if you think they could be managed more efficiently.

2. Net Lease

In net leases, the tenant assumes a more significant share of responsibility for building expenses. Beyond the base rent, you contribute toward operating costs, commonly referred to as "nets."

You'll learn there are three types of Net Leases, single, double, and triple net leases, each with varying levels of tenant responsibility. This type of lease offers the tenant potentially lower base rents but requires careful consideration of potential expense increases.

Single Net Lease (N Lease)

Single net leases (N leases) require tenants to pay a fixed amount of base rent, plus a portion of the property taxes. Landlords usually use a single net lease to shift the liability for paying some property taxes to tenants while covering costs like insurance and maintenance themselves.

The appeal here is lower base rents for the tenant and reduced risk for the landlord regarding fluctuations in property tax rates. It is good to note these are the least common type of net lease due to the other options typically being preferred by most landlords.

Double Net Lease (NN Lease)

In a double net lease (NN Lease), along with paying the base rent, you cover a portion of both the property taxes and the building's insurance premiums. This lease structure shifts responsibility to tenants and attracts tenants with lower base rents. Understanding common lease types, like the NN Lease, is an important part of properly evaluating a commercial real estate opportunity.

Triple Net Lease (NNN Lease)

The triple net lease (NNN lease) is popular among commercial warehouses. In this setup, the tenant covers the base rent, property taxes, insurance, and Common Area Maintenance (CAM).

CAM often includes expenses related to maintaining common spaces, such as:

• Sewer
• Water
• Trash collection
• Landscaping
• Parking lots
• Fire sprinklers

Absolute NNN Lease

An absolute NNN Lease is even more tenant-responsible than a regular triple net lease, placing all building expenses on their plate. Basically, tenants have near-total control over their space, managing almost every aspect like they own the building – but without the purchase, making this lease option a unique choice in the world of commercial leases. This lease requires tenants to be prepared for fluctuating expenses but can be a good fit for those seeking more control over their space.

Benefits of Net Leases

• Greater Transparency and Control: Reviewing a landlord's expenses gives you insights into building operations, potentially uncovering savings and promoting efficient cost management.
• Potential for Lower Base Rent: Because the burden of certain costs is transferred to the tenant, landlords offer reduced rent as an incentive.
• Long-Term Predictability: Net Leases usually include concessions for rent hikes which offer more stability for future expenses.

Considerations for Net Leases

• Exposure to Fluctuating Expenses: You're responsible for a share of building operating expenses. If those costs increase unexpectedly (property tax hikes, insurance premiums surge, unforeseen major repairs), your overall costs also increase.
• Requires Financial Preparedness: Net leases often mean assuming financial responsibilities traditionally shouldered by landlords. Thorough due diligence and having contingency plans to handle these fluctuating expenses is key to succeeding with this type of commercial lease.

3. Modified Gross Lease

Striking a balance, a modified gross lease merges the characteristics of both gross and net leases. It's basically a hybrid. Typically, tenants pay for their base rent and utilities like they would with a gross lease.

However, they may also contribute to certain operating expenses shared among tenants in the building. Understanding the different types of commercial leases involves realizing modified gross lease agreements don't follow a one-size-fits-all template. Instead, the specifics outlined can greatly vary from one contract to the next.

Benefits of a Modified Gross Lease

• Flexibility in Negotiations: Offers a more customizable structure allowing you to tailor specific terms, making it potentially more suitable for businesses with unique needs.

Considerations for a Modified Gross Lease

• Varied Responsibility Allocation: The split between what landlords versus tenants pay, whether it's property taxes, maintenance, insurance, or even things like janitorial services, often varies drastically, requiring careful attention during the agreement phase.

4. Percentage Lease

Commonly used in retail settings like shopping malls, percentage leases introduce a variable element into rent payments. This agreement ties rent directly to your business's performance.

Beyond base rent, a percentage of gross sales is paid. Typically this will apply when you reach a predefined sales threshold, allowing a business experiencing low revenue a lower rent during tough times. This type of lease structure offers lower initial base rents but potentially higher costs depending on how successful your business is, creating an incentive for landlords to maintain prime locations, which often benefit the tenant in the process.

Benefits of Percentage Lease

• Lower Initial Base Rent: This lease model typically has a reduced base rent compared to traditional lease structures, giving startups or businesses in unpredictable markets a financial cushion during early or challenging periods.
• Shared Risk and Reward: If your business takes off, your landlord shares in the success through higher percentage-based rent. But, during slower periods, your rent payments adjust downward with the reduced revenue, sharing some of that risk as well.

Considerations for Percentage Lease

• Potential for Increased Costs: Your lease payment may vary greatly, requiring diligent financial planning, especially for seasonal businesses.

Conclusion

Understanding the different types of commercial leases is a non-negotiable step in making informed real estate decisions. Understanding which lease type aligns with your specific needs and risk tolerance is key.

Speaking with our experienced commercial real estate attorneys can make navigating the nuances of lease agreements smoother. We can also provide valuable insights and guidance in negotiating favorable lease terms, making your experience smoother.

Give us a call or fill out our form today to speak with our proven real estate attorneys to help ensure your business and real estate rights are protected.