Gross Lease
Also known as a Full-Service Lease the landlord covers all the building expenses. This is a commercial lease where the tenant pays a flat rental amount, and the landlord pays for all property charges regularly incurred by the ownership, including taxes, utilities, and water. This lease generally refers to a “base year” to start payments and stipulates a certain escalation in cost to cover inflation.
The rent amount is calculated based on the cost of rent, with a reasonable markup and may include the cost of other services like janitorial or landscaping.
The advantage to this is that it is a flat rent cost similar to that of a conventional apartment lease and is regular and fixed per month. The disadvantage is obvious, the lease charge to a company is higher than the cost to run the building, so the building owner can make some sort of profit after all the building expenses are paid.
This seems to be a compromise to the gross lease seen most residential real estate and the triple net preferred by many commercial property owners. This also allows property owners to forego negotiating or lobbying with lower property tax rates.
The disadvantage of this type of lease is that there are caps to use up to a certain point. This means that the owner will have the right to charge the tenant for the overuse of the building services and utilities.
The advantage of this lease is that because the tenant is assuming most of the expenses, the cost tends to be lower for the tenant. There are disadvantages: the properties with these kinds of leases are harder to secure due to credit requirements. Lessors are also looking for in-place cash flow and will naturally be very discerning with their choice of tenant. The lease amount can also fluctuate based on the creditworthiness of tenants even though they are already paying all the property expenses.
This type of lease is fairly advantageous for the tenant as the rent is usually a flat fee plus a percentage of use of utilities. This leaves the tenant with a fairly good idea of what the monthly costs they will incur. The disadvantage to this type of lease is that if the landlord is very lax on general maintenance for the building may drive customers away, especially if they rely on the appearance to keep clientele.
There you go, all the types of commercial leases you will commonly find when looking for space for your business. The key to finding the right lease is to ask the right questions and to negotiate. If you are looking to find out if the lease is right for you, check out our lease checklist here.
Funded in part through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, conclusions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.
The advantage to this is that it is a flat rent cost similar to that of a conventional apartment lease and is regular and fixed per month. The disadvantage is obvious, the lease charge to a company is higher than the cost to run the building, so the building owner can make some sort of profit after all the building expenses are paid.
Single Net
Also known as a single net lease, where the tenant is responsible for property taxes in addition to rent and utilities. The Single Net is one step beyond what a general gross lease requires a tenant to cover as far as building operating expenses. This is not a common commercial lease type.This seems to be a compromise to the gross lease seen most residential real estate and the triple net preferred by many commercial property owners. This also allows property owners to forego negotiating or lobbying with lower property tax rates.
Double Net
In a double net lease or “net net” lease, tenants pay property taxes and building insurance premiums, in addition to rent and utilities. This type of lease passes more expenses to the tenant but excludes building maintenance. This is the most common commercial lease agreement and is found with properties with multiple tenants.
The disadvantage of this type of lease is that there are caps to use up to a certain point. This means that the owner will have the right to charge the tenant for the overuse of the building services and utilities.
Triple Net
A triple net lease is essentially the opposite of a gross lease. The tenant agrees to pay the real estate taxes, building maintenance, and insurance, in addition to the rent and utilities that are found in Gross Lease agreements. These tend to be popular for investors because they are low-risk with a steady income, with a single tenant, who is leasing multiple properties in a portfolio and with agreements typically lasting 10-15 years. These properties tend to be office buildings, shopping malls, industrial parks, or free-standing buildings operated by banks, pharmacies, or restaurant chains.The advantage of this lease is that because the tenant is assuming most of the expenses, the cost tends to be lower for the tenant. There are disadvantages: the properties with these kinds of leases are harder to secure due to credit requirements. Lessors are also looking for in-place cash flow and will naturally be very discerning with their choice of tenant. The lease amount can also fluctuate based on the creditworthiness of tenants even though they are already paying all the property expenses.
Modified Gross
In a modified gross lease, pays base rent at the lease's inception, but it takes on a proportional share of some of the other costs associated with the property as well. For example, a tenant occupying 50% of a building would be responsible for 50% of its operating costs.This type of lease is fairly advantageous for the tenant as the rent is usually a flat fee plus a percentage of use of utilities. This leaves the tenant with a fairly good idea of what the monthly costs they will incur. The disadvantage to this type of lease is that if the landlord is very lax on general maintenance for the building may drive customers away, especially if they rely on the appearance to keep clientele.
Absolute
Sometimes “absolute lease” and “triple net lease” are used interchangeably. They are not, however, the same. A crucial difference is that an absolute lease delivers the landlord from all responsibility for the building because it includes major building repairs. From an investment point of view, a commercial property with a tenant in place is a key difference, especially if the building is older, the roof, windows, HVAC system, or other major structural components will need to be replaced during the remaining lease term. This lease usually applies only to tenants with national or regional footprints and excellent credit.There you go, all the types of commercial leases you will commonly find when looking for space for your business. The key to finding the right lease is to ask the right questions and to negotiate. If you are looking to find out if the lease is right for you, check out our lease checklist here.
Funded in part through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, conclusions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.
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