Decoding Commercial Leases: A Guide to Different Types of Commercial Leases
If you're considering leasing office space for your business, it's crucial to understand the different types of leases available. In this guide, we'll provide you with an overview of various lease types, including full-service leases, triple net leases, modified gross leases, percentage leases, and more. We'll explore the key features, pros and cons, and factors to consider for each type of lease, helping you make informed decisions for your office leasing needs. Let's get started!
Full-Service Gross Lease:
A full-service lease, also known as a gross lease, is a type of lease agreement in commercial real estate where the tenant pays a fixed rent that includes most or all of the property's operating expenses. These operating expenses typically include utilities, common area maintenance (CAM) charges, property taxes, insurance, and other expenses associated with the operation and maintenance of the property. The landlord is responsible for paying these expenses on behalf of the tenant and includes them as part of the rent amount. A full-service lease provides convenience to tenants as they do not have to separately pay for these expenses and can easily budget for a single, fixed rent amount. However, the rent for a full-service lease is generally higher compared to other types of leases, as it includes the costs of operating expenses.
Triple Net Lease:
A triple net lease, also known as an NNN lease, is a type of lease agreement in commercial real estate where the tenant is responsible for paying not only the base rent but also additional expenses related to the property's operating expenses, including property taxes, insurance, and maintenance costs. The term "triple net" refers to the three types of expenses that the tenant is responsible for, which are typically property taxes, property insurance, and common area maintenance (CAM) charges. In a triple net lease, the tenant bears the financial responsibility for these expenses in addition to the base rent, which is usually lower compared to other lease types. The landlord is generally responsible for the structural maintenance of the building and major repairs, while the tenant is responsible for day-to-day operating expenses. Triple net leases are commonly used in commercial real estate for properties such as office buildings, retail centers, and industrial properties.
Modified Gross Lease:
A modified gross lease, also known as a modified net lease, is a type of lease agreement in commercial real estate that combines elements of both a full-service lease and a triple net lease. In a modified gross lease, the tenant pays a fixed base rent that includes some of the property's operating expenses, while the remaining expenses are paid separately by the tenant or the landlord. The specific expenses included in the base rent and those paid separately can vary depending on the terms negotiated in the lease agreement.
Typically, a modified gross lease may include items such as property taxes, insurance, and common area maintenance (CAM) charges in the base rent, while other expenses such as utilities, janitorial services, and repairs may be paid separately by the tenant. This allows for a combination of the convenience of a full-service lease with the flexibility of a triple net lease.
The allocation of expenses between the base rent and separately paid expenses is typically negotiated between the landlord and the tenant and can vary from lease to lease. It's important for tenants to carefully review and understand the terms of a modified gross lease to determine their financial responsibilities and budget accordingly.
A percentage lease is a unique type of lease agreement commonly used in retail and commercial real estate where the tenant's rent is calculated based on a percentage of their gross sales or revenue. Under a percentage lease, the tenant pays a base rent along with an additional percentage of their sales or revenue that exceeds a specified threshold, which is typically negotiated in the lease agreement. The percentage rent is usually calculated as a percentage of the tenant's gross sales, but it can also be based on other factors such as net sales or total revenue.
Percentage leases are often used in retail settings, where the landlord may share in the tenant's success by receiving a percentage of the tenant's sales in addition to the base rent. The percentage rent is typically calculated periodically, such as monthly or quarterly, and is paid in addition to the base rent.
Percentage leases can provide advantages for both the landlord and the tenant. For the landlord, it allows them to potentially benefit from the tenant's sales performance and increase their rental income if the tenant's sales exceed the threshold. For the tenant, it may provide flexibility in paying a lower base rent, which is tied to their actual sales performance.
It's important for tenants to carefully review and understand the terms of a percentage lease, including the base rent, the percentage rent calculation, and any thresholds or limitations, to accurately budget and plan for their rental expenses based on their sales projections.
In a ground lease, the tenant leases only the land from the landlord and is responsible for constructing and maintaining the building or improvements on the leased land. The tenant may have a long-term lease, and at the end of the lease term, the ownership of the building or improvements may revert to the landlord.
A sublease occurs when a tenant leases all or a portion of their leased space to another tenant, typically for a shorter term than the original lease. The original tenant remains responsible to the landlord for fulfilling the terms of the original lease, while the subtenant pays rent to the original tenant.
Get in touch with a property manager to find the best leasing option for your business.