3 Main Types of Commercial Leases
A Commercial Real Estate lease can be confusing and overwhelming. The great thing about this post is that we’ll be breaking down the different types of lease agreements that a future tenant may encounter to show you that it may not be as complicated as you think.
There are 3 major lease categories: Gross Lease, Modified Gross Lease, and Net Lease. A net lease has quite a few variations so we’ll discuss them in further detail later. Below, you’ll find an overview of each commercial lease type and how it relates to the tenant and the landlord.
1. Gross Lease
With this least type, the monthly rent includes all property operating expenses within it. A few examples of property operating expenses are: building utilities, maintenance, and property taxes.
One reason that this type of lease is the crowd favorite is the tenant rent amount is predetermined for for the length of the lease agreement. This is beneficial for the tenant because even if the operational costs for the entire building outweigh the price that is factored into their rent, the tenant will not be charged any additional fees.
Something to look for in this type of lease is an “escalation clause,” which can put into account an increase of insurance or taxes.
2. Modified Gross Lease/Modified Net Lease
The second lease type is the modified gross lease (also known as modified net lease). The modified gross lease allows a broader range of negations when it comes to operating expenses. The base rent will be subjected to the terms agreed by both parties, similarly to the gross lease. what makes this lease different from the gross lease is the even if the operation costs fluctuates, the lease rate will remain the same.
3. Net Lease
The third and final lease type is the net lease. This lease has multiple variations that the landlord can choose from. Since a net lease can be an entire blog on its own, check out Net Lease 101 to get the full in’s and out’s of this lease type. Out of the 3 lease types, the base rent is the lowest. The main reason for this is because in addition to the rent, the tenant pays a monthly fixed operating expense.
Let’s breakdown the 4 types of net leases:
Absolute Triple Net Lease: The tenant completely takes on all the operational costs of the building. The main benefit in signing this type of lease is that the tenant is virtually the owner of the building but they did not have to purchase the building. A downfall of this lease type for the tenant is that the responsibility of the the building in the event of a catastrophe that destroys the property, the tenant is virtually left on their own. Out of the 4 net leases, this type is used the least.
Single Net Lease: The tenant has 3 main financial responsibilities:
With this lease type, the landlord is responsible for paying the building expenses.
Double Net Lease: A double net lease is the same as the single net lease with one addition; the tenant also pays a portion of the property insurance and property taxes. A positive aspect about this lease for the tenant is that the landlord pays maintaining the common areas, however the tenant is still responsible for paying for their utilities and garbage services.
Triple Net lease: A triple net lease is one of the most common lease types. The tenant is responsible for their rent as well as all or a portion of the property taxes, insurance, and the maintenance of the common area.
Final Thoughts
Read your lease and ask questions. It is your right as a tenant to ask questions and seek guidance if you do not understand something in your lease.
Bianchi Estates, LLC has commercial properties available for lease that may be just right for your needs. If you would like to know more, click here for our Sacramento properties or click here for our Reno properties.
