Signing a commercial real estate lease is no small feat. Despite the typical long-term commitment of a commercial lease, the task at hand doesn’t have to be as intimidating as it seems.
When it comes to this type of real estate, there are 3 standard categories of leases: Gross Lease (or Full Service Lease), Net Lease and Modified Gross Lease. Collectively, this trifecta normally provides a base rent, but each type differs in who pays for which operational cost.
The following is a dissection of each type and what they mean for both the tenant and the landlord:
Gross Lease (Full Service Lease)
In layman’s terms, a gross lease allows a tenant’s rent to cover all property operating costs. Typically, these expenses can include property taxes, utilities, maintenance and more. The landlord pays these costs using the tenant’s rent to offset the expense. This means the base rent is typically high for these types of leases, but is all the tenant pays for.
Tenants often prefer this type of lease because the rent of their building is fixed, even though the expenses are not. This means that the tenants can enjoy the perks of not having to get involved in daily operations. For example, because air conditioning usage increases during the summer and causes electricity costs to go up, rent will still remain the same.
Gross leases are standard for industrial, retail and office freestanding properties. However, landlords can use certain language in leases that will allow them to briefly increase a tenant’s rent due to variable costs.
This type of lease is an extremely adjustable lease in commercial real estate. In comparison to a gross lease, the base rent for a net lease is lower, but the tenant also has to pay for fixed operating costs like property taxes, insurance and common area maintenance items.
There are 4 specific types of net leases:
- Single Net Lease: Tenants pay a set rent and a part of the property tax. The landlord then pays building costs and the tenants pay utilities and other services directly.
- Double Net Lease: This is like the single net lease, but tenants pay for a piece of the property insurance in additional to the property tax.
- Triple Net Lease: This is one of the most common types of leases. This type is perhaps the most preferred to landlords. In addition, this lease allows tenants to review a landlord’s operating expenses and then gives the savings back to the tenant.
- Absolute Triple Net Lease: The tenant takes on all expenses, which allows them to have exclusive responsibility of the building. This also allows tenants to essentially own a building without actually buying it, but if something catastrophic happens to the building, landlords are able to hang the tenants out to dry. This is probably the most rare type of commercial real estate lease.
Modified Gross Lease
This type can also be called a modified net lease. This lease allows for a wider variety of negotiations when it comes to operating costs. Then, the base rent has to be agreed upon by both the landlord and tenant. For this type, the lease rate will remain fixed despite increasing or decreasing costs.