Understanding the Different Types of Commercial Leases

Welcome to the world of commercial real estate! Whether you’re a business owner looking to lease a property or a real estate professional helping clients navigate the market, understanding the different types of commercial leases is crucial. A commercial lease is a legally binding contract between a landlord and a tenant, outlining the terms and conditions of renting a commercial space. From long-term commitments to flexible options, there are a variety of commercial leases available in the market. In this article, we’ll dive into the different types of commercial leases and help you make an informed decision when it comes to leasing a commercial property. Let’s get started!

Full-Service Lease

Also known as a gross lease, a full-service lease is a type of commercial lease where the landlord takes on all the expenses associated with the property. This includes utilities, maintenance, and property taxes. As a tenant, your monthly rent will include an operating cost and a base rent. The operating costs are the landlord’s estimated expenses for the year, which is divided into 12 equal payments to be paid by the tenant every month. The advantage of a full-service lease is the predictability of monthly payments for the tenant and the responsibility of property upkeep for the landlord.

Net Lease

In a net lease, the tenant agrees to pay a portion of the property’s operating expenses in addition to the base rent. There are different variations of a net lease, including single net lease, double net lease, and triple net lease, depending on which expenses the tenant is responsible for. For example, a single net lease means the tenant pays the property taxes on top of the base rent, while a triple net lease means the tenant pays for all operating expenses, including utilities, property insurance, and property taxes. Net leases are ideal for landlords as it transfers some of the risky costs associated with owning a commercial property to the tenant.

Absolute Net Lease

Under an absolute net lease, the tenant is responsible for not only all operating costs but also structural repairs and maintenance of the property. This type of lease is most commonly seen in triple net leases where the tenant is responsible for the entire property, including the roof, foundation, and structure. As a tenant, it’s important to thoroughly inspect the property before signing an absolute net lease, as the responsibility for building upkeep can be costly and unexpected.

Percentage Lease

A percentage lease is a type of commercial lease where the tenant pays a base rent, plus a percentage of their gross sales. This type of lease is most commonly used in retail spaces, where the tenant’s revenue is influenced by the number of customers they bring in. The advantage of a percentage lease for the landlord is the potential for increased rental income, while the tenant can benefit from lower rent during slow months. However, the tenant must also be prepared to pay higher rent during busy months.

Ground Lease

A ground lease is a long-term lease agreement for land only, with the tenant responsible for the construction and maintenance of any buildings on the property. This type of lease is most commonly used for large commercial properties, such as shopping centers or office buildings. The advantage for the landlord is a steady stream of rental income, while the tenant has the opportunity to develop and customize the land according to their business needs.

Modified Gross Lease

A modified gross lease is a mix of a full-service lease and a net lease, where the tenant pays the base rent plus selected operating expenses. This type of lease is often seen as a compromise between tenants and landlords, as the responsibility for operating costs is shared between both parties. Typically, the tenant is responsible for expenses such as utilities and janitorial services, while the landlord covers property taxes, insurance, and maintenance costs.

Conclusion

Leasing a commercial property is a significant commitment and knowing the different types of commercial leases is essential to make an informed decision. From full-service leases to ground leases, each type has its advantages and disadvantages for both landlords and tenants. Consider your business needs, budget, and long-term goals before signing a commercial lease. We hope this article has shed some light on the different types of commercial leases and helps you find the perfect space for your business. Happy leasing!