If you’ve never signed a commercial lease before, it can be quite intimidating. They’re a lot more complicated than a typical residential lease, and the lease agreements don’t work the way most of us are used to.
A commercial lease is a big, expensive commitment, so its only natural to be nervous before signing one. A clear understanding of the different types of leases and what they each mean for you is helpful. We’ll break down the three main types of commercial lease and explain what each type means for you in practical terms.
Gross Lease/Full Service Lease
This is the simplest type of commercial lease. In a gross lease, the tenant’s rent covers all operating expenses.
That means your rent will pay for property taxes, building maintenance, and utilities at a minimum, but it might pay for much more depending on what sort of expenses the owner has for that property. This, of course, means that the rent will be higher than it would be with a different lease, but it’s also the only expense for the tenant.
A gross lease, then, is similar to a standard residential lease in which the tenant’s rent covers the maintenance and taxes. It’s easy and convenient for the tenant.
The advantage for a tenant is usually that they pay a fixed amount each month. Landlords may try to include escalation clauses that allow them to temporarily increase rent in response to an increase in operating costs, however, such as high electric bills during the hottest or coldest months.
Net leases offer lower rent than gross leases, but the tenant is still responsible for operating costs. While the rent is more moderate, overall expenses may be similar, and they’ll be more viable.
In a single net lease, the tenant pays rent and a percentage of the property tax, along with utilities, while the landlord pays for building expenses.
Double net leases require the tenant to pay for the property insurance in addition to everything else they pay in a single net lease and require the landlord to pay for maintenance of common areas if the property has more than one tenant.
With a triple net lease, the tenant pays for some or all of the property taxes, property insurance, and common area maintenance.
Net leases favor the landlords, but tenants do have the right to review the operating expenses and any savings in operating expenses go to the tenant, not the landlord.
An absolute triple net lease is when the tenant takes full responsibility for all of the property-related costs- taxes, insurance, maintenance, utilities, etc. It’s as if you own the building without buying it. This type of lease is rare.
Modified Gross or Net Lease
A modified gross or net lease is simply a lease that’s more heavily negotiated. The tenant and the landlord can decide on who pays for what that’s much more specific to their situation than with any of the lease types listed above. Essentially, it’s a lease agreement that’s drawn up from scratch.
These are popular leases because they can be tailored to the specific needs of the landlord and the client. They provide a happy middle ground between gross leases, which favor the tenant, and net leases, which support the landlord. Usually, the rent and other payments remain fixed once the lease is signed, rather than varying with the monthly bills.
You won’t always have a choice of the type of lease you want. Some property owners will only offer net leases; others will only offer gross leases. This is something you should consider anytime you’re looking at a commercial property. Know in advance what type of lease you’d prefer to sign, and only look at properties that offer those leases.
If you’re willing to sign a net lease of any type, it’s good to know in advance what the property taxes in that area are, and how much of those you’re willing to pay. Some landlords will negotiate that, but many have a set percentage of the property tax they want or need any tenant to pay.
Triple net leases are by far the most common type of commercial lease, and typically if you’re the only tenant, you’ll be responsible for the full cost of the property taxes and insurance. Usually, finding a commercial property with multiple tenants is to your benefit.