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Understanding Commercial Lease Types

By Mike Wheatley | June 12, 2018

Commercial leases are not one-size-fits all. The type of commercial lease will vary depending upon the asset class and building class and the landlord’s and tenant’s needs. Those who would like to start a hair salon business may look for Salon suites for rent.

The names of the lease types alone can be mind boggling. Full service, modified gross, gross, triple net, double net, and single net are the most common types of commercial leases. Tenants should be aware of the differences between these lease types, so they can understand the total lease cost and the risks they are assuming.

Full Service Commercial Lease

A full service lease (also called a gross lease) is most commonly used for office tenants. In a full service lease, the tenant plays a flat monthly rent rate, which is all-inclusive.

The landlord pays for all building operations expenses, including taxes, insurance, utilities, maintenance costs for the building and rental unit, and cleaning services. The tenant also pays its pro rata share of  common area maintenance (CAM), building expenses allocated to the building common area.

A full service lease provides the most stable monthly expense amount for the tenant. In exchange, tenants give up most control over building operations. However, tenants can expect annual increases in CAM charges under most leases.

Triple Net Commercial Lease

A triple net (NNN) lease is frequently used when a tenant rents an entire building. NNN leases also may be used for retail or industrial tenants.

With a NNN lease, the tenant pays the landlord a monthly rental amount, which is lower than under a full service lease. The tenant also pays all real estate taxes, insurance, utilities, commercial cleaning services, and maintenance costs for its rental area. If there are multiple tenants in a NNN lease building, the tenants also will pay CAM charges.

NNN leases may result in a fluctuating monthly rental expense for the tenant. However, the tenant also can expect more control over operational decisions and expenses for its rental space.

Where a tenant leases the entire building, a NNN lease will place all building maintenance costs, including CAM and external and structural repairs, on the tenant. The tenant may even be required to rebuild the building if it is damaged or destroyed in a casualty event. Where there are multiple tenants in the building, a NNN lease is more likely to require that tenants only maintain the interior of their rental space.

Hybrid Commercial Leases

In situations where neither a full service lease nor a NNN lease meets the landlord’s and tenants’ needs, there are a number of hybrid lease types. These include modified gross, double net, and single net leases.

Like a full service lease, in a modified gross lease, the landlord usually will pay for taxes and insurance and will arrange for common area maintenance. In addition to monthly rent, the tenant typically will pay its pro rata share of CAM expenses. In a modified gross lease, the tenant usually must pay for cleaning services for its rental space. If the tenant’s space has separate utility metering, the tenant also may pay for utilities.

With a double net lease, the tenant pays the landlord a monthly rental amount and also must pay property taxes and insurance.  Unlike with a NNN lease, the landlord pays for building maintenance costs. If there are multiple tenants in the building, the landlord usually will arrange for CAM and tenants will pay their pro rata CAM charges. Since tax and insurance amounts and payment dates are predictable, a double net lease makes it easier for a tenant to play lease expenses.

A single net lease is like a full service lease, except the tenant typically pays real estate taxes. A single net lease shifts real estate tax increase risk to the tenant. Therefore, rent for a single net lease is lower than a full service lease for the same rental space.

Selecting the Lease Type

Tenants should be aware of the differences between lease types when comparing lease proposals.  Also, tenants should calculate actual operational costs, including CAM, taxes, insurance, utilities, and maintenance for each lease. Tenants also should consider their ability to pay unexpected expenses, which are likely with NNN and some hybrid leases.

Listing real estate brokers represent the landlord, not the tenant. Each tenant should consult with its attorney and its own real estate or financial professionals to determine the type of lease which best meets the tenant’s business needs.

Mike Wheatley is the senior editor at Realty Biz News. Got a real estate related news article you wish to share, contact Mike at [email protected].
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