Different Lease Types in Commercial Real Estate
When it comes to leasing commercial real estate, it’s crucial to understand the different types of commercial leases available. Each type comes with its own set of terms and conditions, which can significantly impact your business’s financial obligations and operational flexibility. Let’s dive into the various types of commercial leases and what they mean for tenants and landlords.
1.) Gross Lease (or “Full-Service Lease”)
The Gross Lease, also known as a Full-Service Lease, is one of the most tenant-friendly options. In this lease type, the tenant pays a fixed rent amount that covers the base rent and most, if not all, additional expenses like property taxes, insurance, maintenance, and utilities. The advantage for tenants is predictability, as they know their total lease costs upfront.
2.) Net Lease
Net Leases come in several variations, each shifting different expenses from the landlord to the tenant:
a. Single Net Lease (N Lease): In this lease, the tenant pays the base rent and a portion of property taxes.
b. Double Net Lease (NN Lease): In this lease, the tenant pays the base rent, property taxes, and insurance.
c. Triple Net Lease (NNN Lease): The tenant pays the base rent, property taxes, insurance, and maintenance costs. This is the most common type of net lease for commercial properties.
The key feature of net leases is that tenants take on more of the property’s expenses in exchange for lower base rent, giving them more control over operational costs.
3.) Modified Gross Lease
The Modified Gross Lease combines elements of both gross and net leases. While the tenant pays a base rent that includes some expenses (e.g., property taxes and insurance), they might also be responsible for certain operating expenses, such as utilities and maintenance. The specifics of the modified gross lease can vary, and it allows for some negotiation.
4.) Percentage Lease
This lease type is often used in retail properties. In a Percentage Lease, the tenant pays a base rent plus a percentage of their gross sales, typically above a certain threshold. This arrangement aligns the landlord’s income with the tenant’s success, making it more common in shopping centers and malls.
5.) Ground Lease
A Ground Lease is a unique type of commercial lease where the tenant leases only the land, not the building or improvements on it. Typically, these leases are long-term, lasting around 99 years. The tenant might construct a building on the land but will not own the land itself. At the end of the lease, the land and any improvements typically revert to the landlord.
What’s Considered a Short-Term Lease?
Short-Term Leases typically last one to three years, making them suitable for businesses with uncertain growth or those needing temporary space. These leases may come with higher rental rates but offer flexibility and minimal long-term commitment.
What’s Considered a Long-Term Lease?
Long-Term Leases usually span five years or more, providing tenants with stability and potentially lower rent rates. They are ideal for established businesses with a clear growth trajectory and those seeking to lock in favorable lease terms.
Understanding the different types of commercial leases in commercial real estate is essential for both tenants and landlords. The right lease type depends on your business’s needs, budget, and growth plans. Tenants should carefully consider the terms and negotiate to secure the most favorable lease agreement, while landlords should choose a lease structure that suits their investment goals and property type. Consulting with a commercial real estate expert and attorney can help ensure that you make the right lease choice for your specific situation.
