Buckle up!! We’re breaking down the different types of commercial leases.
The Basics: Gross Lease/Full Service Lease
- What you need to know: With this lease type, the tenant’s rent includes all property operating expenses such as property taxes, utilities, maintenance, etc. More specifically, these operating costs and expenses are borne by the landlord out of the total gross rent paid.
- For Landlords/Tenants: The landlord pays these expenses using the tenant’s rent to offset the costs. As a result, the base rent is typically relatively high but is the only cost to the tenant.
Highly Adjustable: Net Lease
- What you need to know: The net lease is a highly adjustable commercial real estate lease.
- For Landlords/Tenants: The base rent for a net lease is typically lower than a gross lease, but the tenant also pays fixed operating expenses such as property taxes, insurance, and common area maintenance items. There are four types of net leases:
- Single Net Lease: In a single net lease, tenants pay a set rent and a piece of the property tax (which would be negotiated with the landlord). The landlord pays building expenses, the tenant pays utilities and other services directly.
- 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 the property tax. The landlord takes over paying for the maintenance of the common area, but the tenant is still responsible for utilities and garbage services.
- Triple Net Lease (a “carefree lease”): The triple net lease encompasses property taxes, insurance, and common area maintenance, with the tenant paying for some or all of the cost of these three things on top of their base rent. This lease type is favourable to landlords because the tenant pays for most things.
- Absolute Triple Net Lease: This is the triple net lease magnified. The tenant takes on all costs enabling them to have sole responsibility of the building. The benefit of this lease is that the tenant can virtually own a building without buying it.
Meeting Halfway: Modified Gross Lease/Modified Net Lease
- What you need to know: This lease type allows for a broader range of negotiations when it comes to operating expenses. The base rent is subject to the agreed terms but the lease rate remains fixed even if costs go up or down.
- For Landlords/Tenants: It’s a happy middle ground between the two parties.