There are many different types of commercial real estate leases, so it is important to familiarize yourself with each type and what they mean in terms of rental rate before signing an office space lease. These leases can be distinguished by rent calculations and how expenses are factored in. Here is an overview of the three major types of leases and some of their variations, as outlined in the article “Types of Commercial Real Estate Leases”:
#1 Gross Leases
In a gross lease, also called a full service lease, your rent covers all of your expenses. The landlord is responsible for taking care of costs like insurance, taxes, utilities, and maintenance, the costs of which are covered by tenants’ rent.
If you are considering a space that offers a gross lease, you should find out what services are provided and the frequency of those services. While it might sound convenient to have the landlord handle expenses, sometimes things like inefficient energy consumption could end up coming out of your pocket. The upside of a gross lease is that you know exactly what your expenses will be for the month or year, rather than worrying about unexpected maintenance expenses, which ultimately leaves you with more time to focus on your business.
#2 Net Leases
There are a few different types of net leases, but in general net leases involve a lower rental rate for the space with tenants paying additional charges for extra expenses to the landlord such as maintenance, operations, taxes, insurance, or shared services such as trash pick-up, water, sewer, parking lots, landscaping, fire sprinklers, etc. Here are a few common types of net leases:
- Single Net Lease – In a single net lease, tenants pay a base rent plus a certain share of the building’s property tax that is proportionally based on how much space the tenant occupies. The landlord is responsible for all other building costs beyond that, except for janitorial services and utilities, which the tenants pays for themselves for their own spaces.
- Double Net Lease – In a double net lease, tenants pay for a share of both taxes and property insurance on top of their base rent, and the share is based on how much of the space the tenant occupies. The tenant is also responsible for utilities and janitorial services, but the landlord takes care of other expenses such as repairs and maintenance of common areas.
- Triple Net Lease – A triple net lease is the most common type of lease for retailers and freestanding commercial buildings. Also called the NNN lease, in this lease the tenant covers three things besides their base rent: taxes, insurance, and common area maintenance fees. Often utilities for common areas and operating expenses are included as well, such as the cost of a lobby receptionist. However, this is still not quite a full service lease, because tenants still take care of expenses in their own space, such as janitorial services and utilities. Again, the percentage that a tenant pays is based on the amount of space they occupy in the property. These leases tend to favor landlords, so carefully review the fees you might have to pay and try to negotiate for caps. The expenses for these leases can also fluctuate from month to month or year to year, so bear in mind that it might be tricky to predict costs. However, base rent for an NNN lease space might be lower than for a full service lease, because you will have more responsibility in taking care of the building.
- Absolute Triple Net Lease – In this lease, which is more rare than triple net leases, a tenant is responsible for expenses in the case of every possible real estate catastrophe, such as rebuilding after a natural disaster or paying rent on a condemned building.
#3 Modified Gross Lease
The modified gross lease is a compromise between the landlord-friendly net lease and the tenant-friendly gross lease. This lease, which is also sometimes called the modified net lease, includes several of the “nets” in the rent—usually insurance, taxes, and CAMs—but leaves the tenants responsible for their own janitorial services and utilities. In this lease the tenant and landlord must negotiate ahead of time what expenses are covered in the rent. Tenants tend to favor this type of lease because they know their rent will still be the same even if insurance, taxes, or CAM costs fluctuate, but at the same time they can control themselves what they spend on things like electricity and janitorial services.
The bottom line when looking at any lease is to keep an eye out for all types of expenses and how exactly you will be responsible for them.