If you’re a tenant looking to lease commercial real estate space, it may be hard to discern the difference between the various lease options offered by landlords. Knowing the types of leases available, and what each structure does or does not include in the quoted rent price, will help you budget for your next commercial space.
When evaluating a space for lease, it is also important to consider the difference between usable square feet and rentable square feet, which includes the “load factor” or “loss factor.” These terms refer to the shared areas in a multi-tenant building, like the lobby, hallways, restrooms, etc., that each tenant pays a pro-rata share for, and will be something you’ll have to factor into your budget and estimated costs.
There are three primary types of commercial leases:
Below, LoopNet provides an overview of each lease type to help you understand how they are structured, and which option is best for your business.
A full-service gross lease, or gross lease, is the simplest type of commercial lease. In this structure, the landlord charges the tenant a gross lump sum payment every month. This rental rate is inclusive of the building’s property taxes and services, including insurance, maintenance and common area maintenance fees or CAMs. Because all of these expenses are included in the rental rate, the cost for a gross lease will be higher than other options in otherwise comparable properties.
Some gross leases are adjusted to exclude utilities or other tenant expenses, which the tenant then pays separately. These agreements are called “modified gross leases.” But most often, a gross lease requires a single comprehensive monthly payment. Many gross leases will stipulate expense caps on the tenants’ portion of the included fees, which the landlord will bill them for in the event of an overage. Some tenants prefer a gross lease because it makes expenses predictable.
Percentage leases are most commonly used for retail properties (especially malls). In a percentage lease, tenants pay a base rent plus a portion of the gross sales they make from conducting business in the building. This type of lease can work well for tenants who want to keep their rental costs low until their revenue increases.
A net lease (meaning “net of” or excluding certain expenses) refers to a lease structure where the tenant pays a base rent and is also responsible for directly paying specific building-related expenses. The base rent amount is generally considerably less than that of a gross lease, since tenants then have to factor in paying their own utilities, cleaning fees, property taxes, CAMs and insurance premiums. Tenants should carefully evaluate these associated costs in addition to the base rent and consider what their total estimated expenses would be.
There are three main types of net leases: single-net leases, double-net leases and, the most common, triple-net leases. We’ll break down each type and its related expenses below.
Single-Net LeaseSingle-net leases are not very common, but in this type of structure tenants pay a base rent plus their pro-rated share of the building’s property taxes. Tenants also typically pay for their own utilities and janitorial service. The landlord covers all other expenses, including insurance premiums and CAM charges.
Double-Net LeaseOften displayed as “NN” in property listings, double net leases charge the tenant a base rent plus the tenant’s share of property tax and insurance premiums. Tenants also pay for their own utilities and janitorial expenses.
What the tenant does not pay for in a double-net lease are common area maintenance fees. These may include expenses for equipment, supplies, maintenance and any necessary repairs of the lobby, restrooms, elevators, stairwells and hallways, as well as the salary of a lobby attendant or security guard. These costs are covered by the landlord.
Triple-Net LeaseThe triple-net, or “NNN,” lease, charges tenants a base rent, and tenants are then responsible for paying their own utilities and janitorial expenses, in addition to their share of the property tax, insurance premiums and CAMs. The base rent for a triple-net lease is often a lower cost due to the fact that the tenant is responsible for all the associated charges of the property. Triple-net leases are one of the most common types of commercial leases. You can read a detailed explanation of the NNN lease here.
Triple-net leases are beneficial for tenants as they allow them to pay their fair share of building expenses, and depending on individual usage, some tenants can save on costs compared to a gross lease. However, this lease type also comes with risks considering the tenant bears all the responsibility for expenses. Tenants can consider negotiating a cap on expenses in a net lease structure, especially if the building is older and may need frequent repairs.
An uncommon variation known as an “absolute-net” lease or “bondable lease” holds the tenant responsible for paying rent, expenses and for all repairs to the building. The tenant is responsible for these items regardless of the building’s condition, even if it becomes condemned, and also for rebuilding it in the event of a disaster. This type of lease is mostly used by landlords who have borrowed heavily to finance the property and pledge the rent money as a security for the debt, and it puts all risk on the tenant.
No matter what type of lease structure a building utilizes, it’s a contract — and contracts are negotiable. With so many lease items to consider, you’re likely to find trade-offs or concessions that will result not only in a signed deal, but an amicable relationship that lasts for the duration of the multi-year lease. As always, it’s prudent for tenants to consult a tenant representative broker and legal professional when drafting and negotiating lease terms for a property.
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