Back to Basics: Breaking Down Commercial Lease Types

October 26, 2020 | By: Molly Looman
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For veterans of the property management profession, the distinction between different types of commercial leases is easy, but it can be confusing for people just entering the industry. While each lease is specific to the property and the management team, let’s break down the three main buckets that most commercial leases fall into: Gross, Net, and Modified.

Gross Leases

Gross leases are also known as full-service leases. In this form of a lease, the landlord charges a gross lump sum to the tenant on a monthly basis. The tenant is responsible for base rent but the landlord is responsible for building expenses.

This type of lease allows for easy forecasting by the tenant and they can grow their business without worrying about variability in their monthly payments. However, the lease should involve a lot of discussions so that the billing process is clear and everyone is on the same page about who is responsible for what.

Net Leases

A net lease is probably the most common type of commercial lease. It involves the tenant paying a part of the building’s operating expenses in addition to rent. There are multiple types of leases including single, double, and triple net leases.

In a triple net lease, the tenant takes on all costs that could include base rent, utilities, janitorial, the share of property tax, insurance premiums, and common area maintenance. This is a very common arrangement as it allows the tenant to have a lot of control over their property and the landlord incurs fewer expenses. However, expense caps, tenant improvements, and other fine details should be negotiated beforehand. Base rents can be lower than in a gross lease but the tenants have a higher level of risk when it comes to incurring unexpected costs.

Modified Gross/Net Leases

A modified gross lease is sometimes seen as a compromise between the gross lease and the net lease. Similar to a gross lease, rent is requested in one lump sum. This rent can include all the “nets” such as property taxes, insurance, and common area maintenance. The difference is that janitorial and utilizes are often excluded from the rent and are still covered by the tenant.

The tenant typically pays a pro-rata share of the building’s operating costs and the percentages and amounts are negotiated based on occupancy and other factors. This lease leaves a lot of room for negotiation and the terms are agreed upon by both parties. Tenants have a bit more control over their expenses with utilities and landlords get to recoup any savings in building operations expenses.

Sources:
https://www.loopnet.com/learn/a-guide-to-the-most-common-types-of-commercial-leases/228906831/
3 Types of Commercial Real Estate Leases
https://42floors.com/edu/basics/types-of-commercial-real-estate-leases