As we’ve mentioned before, there are significant differences between commercial real estate and residential real estate. One of them is glaringly evident in the leases associated with each— in fact, commercial leases are much more complicated. While a tenant is often responsible for paying their rent and possibly utilities from month to month in a residential lease, commercial leases typically hinge on the type of tenant business.
The four most common types of commercial real estate leases are the Gross Lease, the Net Lease, the Percentage Lease, and the Modified Net Lease.
The gross lease is also referred to as a full-service lease and is one in which the landlord is responsible for paying all or most of the costs, including insurance and taxes. The landlord collects a fixed amount from the tenant each month and uses it to cover the building’s expenses. With this type of lease, the landlord assumes all responsibility for the property, thus making it one of the easiest for tenants. You may find this type of lease used most often with offices, as well as some industrial and retail properties.
With a net lease—ranging from single, double, and triple net leases—the landlord will charge a lower base rent for the space, in addition to some or all of the expenses associated with maintaining and operating the property, including taxes and insurance. In this lease, landlords may also charge to cover the costs of sewer, water, trash collection and the like. While this type of lease is notable for favoring the landlord and can be used in any type of business, it is common in retail and industrial settings.
Just as the name suggests, this type of commercial real estate lease involves the tenant paying a base rent plus a percentage of their monthly sales. This is ideal for retail tenants whose sales can fluctuate depending on the time of year (for instance, the holiday busy season) and of course, the economy. Often a specific threshold will need to be met before the landlord would receive a percentage of the tenant’s sales.
Modified Net Lease
This type of lease is a combination of the triple net lease (in which the tenant pays rent in addition to taxes, insurance, and maintenance costs) and the gross lease. Instead of either the landlord or tenant paying all of the expenses as well as utilities, the modified net lease allows for negotiations between the two and splitting them in an agreeable manner. The modified net lease may work well for older buildings with higher maintenance costs or those with high utilities.
Not sure which type of commercial real estate lease will work best for you? Contact Northern Edge Commercial Real Estate today!