Commercial Real Estate Lease Types Broken Down
Below is a list and breakdown of the three most common types of commercial real estate leases, along with their benefits to the landlords and tenants.
Net Lease: A net lease is where the tenant pays a base rate, but also shares in the operating costs of the building. Expenses to the tenant is responsible for is dependent on what type of net lease is being used.
Single Net – Tenant pays pro-rata of property taxes plus base rate.
Double Net – Tenant pays pro-rate of property taxes and insurance plus base rate.
Triple Net – Tenant pays pro-rata share of property taxes, insurance, electricity, janitorial, and maintenance, plus the base rate.
Tenant: A net lease eliminates the risk that the landlord will overcharge to cover the risk of costs increasing. However, this increases difficulty for the tenant to budget affectively.
Landlord: A net lease minimizes risk of the landlord estimating expenses incorrectly by allowing them to charge the tenant actual costs. However, it may decrease profit margins that may exist from the landlord overestimating or reducing expenses.
Percentage Lease: A percentage lease is where the tenant pays a base rate and operating expenses plus additional variable costs based on monthly revenue. These are very typical for real estate spaces in highly desirable areas. Base rates are also less than a net lease or gross lease, and have many mutual benefits between landlord and tenant.
Tenant: The tenant will benefit from paying a lower base rate and operating expenses, along with diluting risk for variable monthly performance. However, the tenant will also need to give up some profit to the landlord.
Landlord: The landlord can benefit when their tenants are doing very well, and will get a better return. However, when the tenant has a slow month it may be difficult for their bottom line.
Gross Lease: A gross lease requires the tenant to pay one flat rate per month. The tenant will not be billed separately for any of the building’s operating expenses, as these will be estimated and included in the overall rent.
Modified Gross Lease – In some instances where a modified gross lease is offered, the tenant will be responsible for certain expenses related to the operation. The most common are electrical and janitorial.
Gross Lease with Expense Stop – An expense stop on a gross lease is a tool use by landlords to limit their exposure to operating costs. As such, helps to maintain predictable operating expenses over the term of a lease.
Tenant: The tenant benefits with a gross lease because they know exactly what they will be paying, which promotes better budgeting. The downside is they may end up paying a bit more over the life of the lease.
Landlord: These are typically seen as more beneficial to the tenant but can help the landlord with budgeting.
If you have any questions about commercial leases or need advice during a transaction, please speak to a lawyer!
