Commercial real estate: 3 types of leases to proceed with!

Commercial real estate: 3 types of leases to proceed with!

Lease agreements associated to commercial properties may seem overwhelming because they’re a long-term commitment and cost lots of dough! Still, it can be less complicated if you get acquainted with types of commercial real estate leases.

It can be divided into three types namely; gross lease (aka full-service lease), net lease and modified lease. A common aspect among all three is providing a base rent with variations vested on the one who pays for operational expenses.

Find out about different lease types and what they mean for both tenants and landlords by reading the details below;

  1. Gross/Full service lease

Rent that’s obtained from the occupant covers all major to minor property operating expenses in gross lease. These expenses might include but not limited to utilities and maintenance, property taxes and more. The landlord is liable to pay for these expenses through the occupant’s rent thus balancing the cost. The result is base rent being relatively high and the only cost to the tenant.

Tenants prefer this lease because it’s relieved from those day-to-day operations and keeping the rent fixed even if expenses are going out! Take example of summer season in which frequent use of air-conditioning unit increases the electricity cost however, rent would remain constant. Industrial, retail and isolated business properties are typically bound through this lease.

Many owners try and successfully include a flexibility of variable cost in the lease simply by adding “escalation clauses” that represents either taxes or insurances. They may also incorporate language setting that temporarily let then increase the rent based on those variable costs. Now, take the same air-conditioning example again and the amount is likely to be included in your next month’s rent or bill to cover or maintain the balance.

  1. Net Lease

It’s a highly flexible lease for commercial properties; base rent for net lease is less than the typical gross lease however the tenant is liable to pay the fixed operating expenses like insurance, property taxes and common area maintenance. Net lease can be further classified into;

  • Single net lease

Occupants are liable to pay a defined rent and fraction of property tax (which is negotiated initially with the landlord). Building expenses are paid by the property-owner whereas payment of utilities and other services are accountable on the tenant.

  • Double net lease

Much similar to the single net lease except that in double net lease, tenant also pays for insurance along with the property tax. Expense over common area maintenance is on the landlord however tenant remains accountable for the utilities and other services on his own.

  • Triple net lease

Property taxes, insurance and common area maintenance are all covered by the triple net lease where all three are liable on tenant along with the base rent. It’s one of the most common types of leases associated to commercial properties. Structure of the lease is favourable for landlords as well as allow tenant to review owner’s operating expenses so all savings comes directly on the occupant.

  • Absolute triple net lease

As the title implies, magnifying features of the triple net lease gives you absolute triple net lease. All expenses are vested on tenant’s shoulders except for the building responsibility. Purchasing a freestanding building might seems a better option here but the biggest benefit is perhaps with the ownership that’s more on the occupant as he’s eventually paying for every service there is. It’s most uncommon type of lease but knowing about it is always good!

  1. Modified gross/net lease

The third and one of the most prominent commercial real estate leases of all is the modified gross/net. It offers a middle ground for both tenants and the landlords and formed after mutual cooperation of both participants. Clauses in the lease are however set as per the country laws.

Conclusion

If your niche is commercial real estate market, better get acquainted with the common leases simply through the details above.

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