When it comes to commercial leases, the different types and options that are offered can be overwhelming and confusing. Depending on a business and its situation, different lease types could result in very different monthly payments and concerns. Understanding the different categories and modifiers to each is important for anyone who owns (or is considering owning) a commercial real estate space.
What is a Commercial Lease?
A commercial lease is an agreement between a tenant and a landlord, just like a residential lease. The main difference is that the tenant on a commercial lease is a business rather than a person, and the property is only for business use rather than for living in.
While commercial leases are structured and named differently, they have broad similarities to residential leases when it comes to what your rental payment includes. In some residential rentals, your rent includes utilities and maintenance, while others it doesn’t. Commercial leases can be the same way, with some types that include operational costs and other types that don’t, and the tenant is responsible for those costs separately.
Types of Commercial Leases
Let’s take a look at those different types, what each covers in the monthly payment, and what needs to be paid for separately. The four most common types of commercial leases are:
While there are certainly other types of leases, they’re much less prevalent, so we are going to focus on these four today.
Full-Service Gross Lease
In a gross lease, the tenant pays a single 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 utilities, maintenance, taxes, and more — hence the “full-service” nickname. Because of this, the base monthly payment is higher than the other lease types we’ll discuss below. However, it’s the simplest option for tenants and protects them from liability and responsibility of building issues such as damage or changes in zoning or property taxes.
These types of leases can be more common in older commercial buildings, where separate metering of the utilities may not be a viable option and the landlord has to pay everything together.
Full-Service Gross Lease Payments Cover:
- Use of the space
- Utilities
- Janitorial services
- Common area maintenance fees
- Property taxes
- Building insurance
What Needs to be Paid Separately:
- N/A
Modified Gross Lease
Similar to the gross lease, in a modified gross lease, the tenant pays a fixed rental payment for use of the space. The difference is that there is much more negotiation of terms and included fees between the tenant and the landlord that often results in the tenant’s payment not covering all operating expenses. Typically, in a modified gross lease, the tenant is responsible for separate payment of the utilities. It’s important to note, however, that because these leases are negotiated between tenant and landlord, each one is different and can have a wide range of structures.
Modified Gross Lease Payments (Often) Cover:
- Use of the space
- Common area maintenance fees
- Property taxes
- Building insurance
What Needs to be Paid Separately:
- Utilities
- Janitorial services
Percentage Lease
A percentage lease requires the tenant to pay a portion of their monthly sales on top of their base rent. These are common in environments such as malls or retail properties and are beneficial to smaller businesses that don’t have high revenue immediately. This way, they can keep their rental costs low until their sales increase. Because the sales percentage is negotiated with the landlord, be wary if they’re asking for more than 10% (7% is commonly used as a standard).
Percentage Lease Payments Cover:
- Use of the space
- Percentage of sales
- Utilities
- Janitorial services
- Common area maintenance fees
- Property taxes
- Building insurance
What Needs to be Paid Separately:
- N/A
Net Lease
In a net lease, the tenant pays rent plus a monthly reimbursement for property operating expenses. 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. This leads to lower base rent, but the tenant is responsible for additional costs (ex. Building insurance) and responsibilities (ex. Cleaning services) around their space.
Exactly what reimbursements the tenant pays is based on the type of net lease, either Single, Double, or Triple.
Single-Net Lease (N)
While relatively uncommon, this net lease is structured where the tenant’s monthly lease payment doesn’t cover property taxes so they have to pay a prorated share of the building’s property taxes. Utilities and janitorial services are often also not covered and are paid separately.
Single-Net Lease Payments Cover:
- Use of the space
- Common area maintenance fees
- Building insurance
What Needs to be Paid Separately:
- Utilities
- Janitorial services
- Property taxes
Double-Net Lease (NN)
A double-net lease takes the single-net lease structure but removes the building insurance from the monthly lease payment, so in addition, insurance premiums are paid by the tenant. In this lease type, the tenant does not have to pay for common area maintenance (CAM) fees such as lobby, restroom, or elevator repairs.
Double-Net Lease Payments Cover:
- Use of the space
- Common area maintenance fees
What Needs to be Paid Separately:
- Utilities
- Janitorial services
- Property taxes
- Building insurance
Triple-Net Lease (NNN)
On the opposite end of the spectrum from gross leases, a triple-net lease only has the landlord charge a relatively low base monthly payment for use of the space. Everything else, from utilities and cleaning services to property taxes and insurance are taken care of by the tenant separately. This is why triple-net leases are preferred by landlords — tenants pay bills directly to the utilities company or government directly without their involvement. This isn’t to say that this lease type is negative for tenants, though. If they’re organized and pay bills on time, it can actually lower their individual rent, depending on usage of factors like utilities and keeping the property well-maintained to lower other costs.
Triple-Net Lease Payments Cover:
- Use of the space
What Needs to be Paid Separately:
- Utilities
- Janitorial services
- Common area maintenance fees
- Property taxes
- Building insurance
Every Lease is Different
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. For any lease you’re considering, we recommend hiring an attorney to review it, even if you are using a “standard” lease form.
