Types of commercial real estate leases can vary depending on the type and appropriation of the property. Purchasing such commercial property is considered to be a good investment option for an investor.
However, due to capital limitations, sometimes buying a property can not be succumbed to the lasing options, representing a form of a disadvantage for the buyer.
In general, there are many different types of leases, but the most important ones the three main ones – the two of whom calculate rent methods more than other leases (the ‘gross’ and ‘net’ commercial real estate leases). When net and gross leases are fused, they form a “modified gross lease”. Let’s get into details.
1. Gross commercial real estate lease – the “full service” lease
A Gross type of commercial lease means that a tenant should pay the rent amount to the landlord, so he can use it to cover the property’s expenses like insurance taxes and maintenance (security, utilities, and janitorial). A gross lease is also known as an “all-inclusive rent” that provides a “full service” tenancy.
The janitorial services are made and offered clearly, during the negotiation process, especially clarification on the excess utility consumption that exceeds the building standards. For instance, if a building (or a tenant) is a huge electricity consumer, that should be stated in the CRE lease agreement, to verify if the tenant or the landlord should pay the expenses.
2. Net Lease
The rent base in a Net commercial real estate lease is usually smaller, thus the tenant has no part in the expenses. The landlord charges rent for the CRE, plus some operating and maintenance expenses.
The Net Lease may entail property insurance and real estate taxes for some common areas like parking lots, trash collection, fire sprinklers, sewer, water, property management fees, janitorial services, and other, commonly shared services. The Net lease is also subdivided into four other different types of leases!
Single Net Lease (The “N” Lease)
The Single Net real estate lease is the form of a lease where a tenant pays the expected base rent with some building maintenance expenses from a shared basis. Even when the tenant settles janitorial services and utilities for the month, the landlord can cater for other building expenses during the tenancy.
Double Net Lease (The “NN” Lease)
In addition to the rent, the tenant has to settle the property insurance and taxes. The landlord caters to commonly used areas of maintenance and provides structural repairs while the tenant deals with utility and janitorial expenses.
Triple Net Lease (The “NNN” Lease)
The triple Net type of commercial real estate leases is the most popular type for retail spaces and commercial buildings. In this lease, the tenant has an obligation to the basic (monthly) rent. He pays for a part of the “Net’, and things like insurance, operating expenses, property taxes, or common area utilities and janitorial services.
The facility managing data is used to estimate the tenants’ charges and expenses. For instance, when a tenant leases 3000 square feet of the property space, he pays around 10% of the building’s taxes. Tenants have to carefully negotiate conditions of the NNN lease, reviewing fees on the annual expenses.
However, the NNN leases are also allowing transparency, enhancing the connection to the business, operating expenses, and customers. With this lease, the tenant enjoys cost savings rather than the landlord.
Absolute Triple Net Lease
The Absolute Triple Net Lease is more binding and rigid than the NNN lease, making it a less utilized option. Here, tenants have to carry the burden of every risk in the market – ever imaginable. For instance, they may be obliged to pay rent for a building they don’t live in or cater to reconstruction expenses after some catastrophes.
3. Modified Gross Lease
The Modified Gross tenure in commercial real estate leases is used to form a unique and convenient compromise that is both landlord and tenant-friendly. The modified gross lease requests rent in a lump sum, accountable for all or some of the net-like property maintenance such as insurance, taxes, janitorial services, and utilities that the tenant covers. These ‘nets’ are negotiated with the landlords and tenants.
The modified gross lease is much more flexible and tenants use it popularly. It allows for the building’s operating expenses to be shared between tenants, using a data share based on the percentage of the building occupancy.
What to expect from different types of leases
They’re All Negotiable!
When analyzing different lease options, it is critical to not only focus on rental rates but examine all the expenses and options because sometimes additional expenses can occur, added to the monthly rate, and sometimes rental rates can be lowered down. Regardless of the lease type, the market forces rental rates of various properties and keeps them stable.
The crucial thing for commercial real estate leases is for tenants to carefully clarify the expenses they want to cater to their tenure contracts, and eventually understand all the different types of leases. It is always good to bear in mind that additional charges may emerge, and that fully discussed and negotiated terms are in the best interest of the tenant and the landlord.
