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Today's Tenant Rep Tuesday Tip topic: Types of Commercial Leases - A Quick Guide to the Various Types of Commercial Leases

There are three main categories of leases when it comes to commercial real estate:

  1. Gross Lease (also known as Full Service Lease)
  2. Net Lease
  3. Modified Gross Lease

The connecting link between these leases is they all provide a base rent with variability around who pays for which operating expense.

Here's a breakdown of the different types of commercial real estate leases, and what they mean for tenants and landlords:

  1. Gross Lease (Full Service Lease)

The tenant’s rent covers all property/building operating expenses. These expenses include: property taxes, utilities, and maintenance. The landlord pays these expenses from the rent the tenant pays in order to offset costs. This lease type is common for industrial, retail, and office freestanding buildings.

  1. Net Lease

The base rent for a net lease is lower than a gross lease, but the tenant also pays towards fixed operating expenses such as property taxes, insurance, and common area maintenance (CAM) items. There are four types of net leases: Single NEt, Double Net, Triple Net, and Absolute Triple Net. The most common of Net Leases being a Triple Net Lease. 

Triple Net Lease: The triple net lease includes property taxes, insurance, and common area maintenance, with the tenant paying for some or all of the costs of these three things in addition to their base rent. 

Single Net Lease: In a single net lease, the tenant pays a set rent and a portion of the property taxes. The landlord pays building expenses, and the tenant pays utilities and other services. 

Double Net Lease: A double net lease is similar to the single net lease, except the tenant also pays a piece of the property insurance along with their portion of property tax fees. The landlord pays for maintenance of the common area, but the tenant is still responsible for their own utilities and additional services. 

Absolute Triple Net Lease: This is the triple net lease amplified. The tenant takes on all costs allowing them to have the sole responsibility of the building. This is the most uncommon type of commercial real estate lease.

  1. Modified Gross Lease

Modified Gross Lease (or Modified Net Lease) offers a balance for both tenants and landlords. The modified gross lease allows for negotiations when it comes to all the operating expenses. The base rent will then be subject to the terms agreed upon by both tenant and landlord, such as with the gross lease. The differentiating factor with a modified gross lease is that the lease rate remains fixed even if costs increase or decrease.

 

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