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The 4 Types of Commercial Real Estate Leases

Perhaps you have a business plan in mind and are wanting to educate yourself on commercial leases, or maybe you are seeking out some new office space. Commercial real estate leases are used when it comes to businesses and workspaces; they aren’t like the typical lease agreement that you are used to. There is much to learn if you are wanting to make the transition into using a property for commercial use as opposed to residential use.

What Is A Commercial Real Estate Lease?

Commercial Real Estate Lease

A commercial lease is an agreement between a business or organization and the property owner or landlord who is leasing the property for commercial use. Every area has different zoning laws that must be followed; this means that there are restrictions concerning the type of company you are permitted to run out of an office space. If you and your landlord fail to comply with your local zoning laws, you will face legal consequences. There are four types of commercial real estate leases. There is a gross lease (also known as a full-service lease), modified gross lease, net lease, and percentage lease.

Gross Lease (Full-Service Lease)

A gross lease is one that combines all of the costs associated with owning a property with the base rent amount that the tenant is responsible for. The base rent is often much more costly in this situation than with other leases due to the fact that the landlord is relying on the tenant paying their bills on time so that they can cover their own expenses. A full-service lease includes the cost of utilities, property taxes, renter’s insurance, common area maintenance, and all other costs associated with running a property and maintaining its livability.

Modified Gross Lease

This lease agreement is typically the most beneficial for both parties involved. In a modified gross lease, the base rent amount (which is fixed), and the costs to keep the property afloat, are discussed between the tenant and the landlord. This means that all terms are negotiable and both parties are able to sit down together and come to as mutually beneficial of an agreement as possible. If you don’t agree with what your landlord is asking you to pay, in this case, you can do your best to come to a compromise with them.

Net Lease

Net leases do not include the costs that come with running a property. However, while the base amount will be lower, you will make up for this discount by paying more in other areas. In a net lease, the tenant is responsible for the taxes, insurance fees, and any maintenance expenses along with their quoted rent. Typically, the landlord would cover those costs, but a net lease operates much differently. There are different types of net leases; single net leases, double net leases, and triple net leases. A single net lease is when a tenant covers the cost of utilities, maintenance, and similar costs and pays them at the source as opposed to paying them to the landlord. Essentially, a single net lease eliminates the middleman. To separate utility costs, there is an individual metering system for both the electric and HVAC so that the amount being paid is accurate. In a single net lease, tenants also must pay a percentage of the property taxes. A double net lease’s only differentiator is the fact that the tenant would be required to pay a percentage of the property taxes and insurance. A triple net lease is similar to the ones mentioned before; the tenant is required to pay for the majority of if not the entire tax bill, insurance, and common area maintenance. This is, as always, on top of their base rent amount. A triple net lease is great for property owners since they will not have to front any costs related to the operation of a business.

Percentage Lease

A percentage lease happens when the tenant of a commercial property pays their base rent as well as a portion of their monthly sales. This means that the tenant doesn’t need to pay as much in rent because the landlord is receiving some of their company profits. A percentage lease is typically between landlords and owners of retail establishments since the contract is based on monthly sales. If you are considering a commercial lease, you will need to first decide what costs you are comfortable covering as a business. Commercial leases can be quite costly, so make sure you fully understand what you are agreeing to before signing.