In reality, fully understanding a commercial lease requires attention to detail and help from a tenant broker. Who will be responsible for paying property taxes and insurance — you or the landlord? Who will pay for utilities? Who will cover maintenance expenses? To discover the answers to those important questions, you need to know exactly what kind of commercial lease you are signing.
A landlord can use one of several different commercial real estate lease types when renting out office space. Understanding the differences between each type of business lease will make you smarter during negotiations and help your company better budget monthly expenses.
Let’s review the different types of commercial real estate leases so you’ll know what to expect as far as cost and how to negotiate an agreement. Typical outlines for each lease type are listed below, but it’s crucial to note that while each lease category will provide a sense of the tenant’s expected expenses, it is only a sense—there are no absolute rules. Every lease is negotiable, so a thorough review of the lease with your tenant broker and attorney is the only way to know for certain which expenses fall under your purview.
Full-Service Lease/Gross LeaseSigning a full-service lease (also called a gross lease) means you are responsible for paying the base rent. Generally, the landlord handles the additional building expenses, including maintenance fees, insurance, and real estate taxes. Typically, this results in relatively high rental rates — but as a tenant, you only receive one bill that covers all necessary office expenses. This makes it easier for tenants who want to avoid getting involved in the day-to-day of running an office.
However, with some full-service gross leases, some tenants are still required to pay their proportionate share of operating expenses above their base year. This limits how much a landlord is required to pay for tenant expenses past a certain amount. Regardless, make sure to carefully and thoroughly examine your gross lease so you understand whether any conditions, such as additional expenses, are present in the agreement.
In summary: What is a full-service (or gross) lease?
Net LeaseA net lease refers to a category of commercial real estate leases. Net leases usually stipulate that tenants pay a proportionate share of the building’s operating expenses: common area maintenance (referred to as CAM) fees, property taxes, and insurance. Types of net leases include triple, double, and single. Each type of net lease has its own level of financial obligation that the landlord passes onto the tenant.
In commercial real estate, landlords typically calculate each tenant’s pro-rata share of operating expenses like this: They take the total operating cost per square foot for all rentable space in the building. They then divide that sum among tenants based on the percentage of the building occupied by each tenant.
In summary: What is a net lease?
Let’s dive into the specific types of net leases that you’ll see when renting commercial space.
Triple Net Lease/“NNN” LeaseA triple net lease is essentially the opposite of a gross lease. The tenant (you) agrees to pay for not only the fees for rent and utilities but also all of the commercial property’s operating expenses, such as maintenance fees, building insurance, and property taxes. Usually, triple net leases come with reduced rental prices because the tenant has assumed responsibility for the operating expenses. NNN leases are often longer-term and have concessions for rent hikes written into the lease.
For some tenants, maintenance fees are higher than expected, leading them to try to renegotiate or break their leases. Pre-emptive landlords will use a “bondable” net lease, which cannot be ended before it expires, nor can the rental costs be updated.
In summary: What is a NNN lease?
Double Net Lease/“NN” LeaseA double net lease requires the tenant to pay for the rent and utilities, as well as the property taxes and building insurance. However, the landlord pays directly for the building’s structural maintenance expenses. Like other net leases, base rent is generally lower since the tenant is responsible for additional expenses.
Landlords renting an office building to multiple tenants will likely divide the property tax and building insurance expenses fairly among the tenants.
In summary: What is a double net lease?
Single Net Lease/“N” LeaseA single net lease stipulates that tenants pay for rent and utilities as well as property taxes. The landlord takes care of building insurance and maintenance expenses. Be careful not to confuse a single net lease with a net lease. A net lease refers to a category of leases including single, double, and triple.
In summary: What is a single net lease?
Modified Gross LeaseA modified gross lease occupies the middle ground between a gross lease and a triple net lease. In general, a modified gross lease means that the tenant pays base rent, utilities, and a portion of operating costs.
The details vary from contract to contract. In some modified gross leases, tenants pay only base rent and utilities for the first year but in each additional year pay a pro-rata share of the building’s operating costs. Their share of expenses would likely be based on the percentage of the building that they occupy. For example, a tenant occupying 50% of a building would be responsible for 50% of its operating costs.
In summary: What is a modified gross lease?
Absolute NNN LeaseSometimes people incorrectly use the terms “absolute NNN lease” and “triple net lease” interchangeably. They are not, however, the same. Usually, triple net leases require tenants to pay for some or all building repair expenses (such as structural repairs or repairs to the roof), but in some cases, the landlord will assist with those expenses.
Conversely, an absolute NNN lease absolves the landlord from all responsibility for the building’s expenses in every case. That means the tenant must cover all building expenses, including any maintenance or repairs to the building’s roof and structure. Essentially, the tenant owns the building without having to purchase it. This lease usually applies only to tenants with national or regional footprints and excellent credit and is long-term. The base rent for an absolute NNN lease is typically much lower than other types of leases.
In summary: What is an absolute NNN lease?
Percentage LeasePercentage leases require tenants to pay a base rent in addition to a percentage of gross business sales (once sales pass a threshold). Landlords often ask for seven percent. Be wary if one asks for 10 or 12 percent. Retail mall outlets typically have these types of commercial real estate leases.
One upside of percentage leases is that they typically offer lower base rents than standard leases since the tenant is agreeing to pay a portion of sales.
In summary: What is a percentage lease?