Posted by Mike Langolf ● Jun 26, 2020 2:00:00 PM

Commercial Lease Types

commercial leases

The three most common types of commercial leases are gross Leases, modified gross Leases and net leases. While there are certainly other types of leases, we are going to focus on these three types in this post.

Gross Lease

In a gross lease, the tenant pays a fixed rental payment in exchange for the use of the space. Under this type of lease, the landlord is responsible for all the property operating expenses including basic utilities. Gross Leases will be more expensive on a square footage basis to offset the cost of the property expenses that the landlord must cover.

These types of leases are more common in older commercial buildings, where separate metering of the utilities may not be a viable option.

 

Modified Gross Lease

Similar to the gross lease, with a modified gross lease the tenant pays a fixed rental payment for use of the space. The difference is that the payment the tenant makes does not cover all of the operating expenses. Typically, in a modified gross lease, the tenant is responsible for a separate payment of the utilities.

 

Net Lease

In a net lease, the tenant pays rent plus a monthly reimbursement for property operating expenses. Exactly what reimbursements the tenant pays is based on the type of net lease.

The landlord will estimate the expenses for the year and bill the tenant in equal installments for the year. At the end of the year, after all the actual expenses are audited, adjustments may be required of the tenant.

Two of the most common sub-types of Net Leases are:

  • Triple Net Leases or NNN: This is when the tenant pays rent plus expense reimbursements for real estate taxes, property insurance and common area maintenance fees, also known as CAM.
  • Double Net Lease or NN: This is when the pays rent plus expense reimbursement for real estate taxes and insurance only.

While these are the most common types of leases in commercial real estate, it is ultimately up to the landlord and tenant to negotiate a lease that works for both parties regardless of the type of lease.

Tenants should be aware of open-ended adjustments that may be included in leases. This is especially important in new construction, where the actual property operating expenses have not yet been established and may be subject to large variances.

For all commercial leases, I would recommend that a tenant hire an attorney to review even when the landlord is using a “standard” lease form.

 

More Resources

Related: Understanding Debt Yield and Why It's Important to Lenders,  Understanding Capitalization Rate Formula

Topics: DSCR, Finance, Small Balance Commercial