What type of commercial leases exist?

On Behalf of | May 1, 2023 | Commercial Real Estate

When negotiating a lease for your business, you must choose the proper lease agreement to suit your business needs. Commercial leases come in different types, structured to work with specific business operations needs. Commercial leases may have some differences but can fall into three main categories.

Gross leases

In gross leases, the landlord pays for all expenses related to the property, and the tenant only pays their monthly rent. Expenses paid by the landlord typically include property tax, maintenance costs and insurance.

Some landlords use a modified gross lease, in which the tenant pays their base rent plus utilities and a portion of the building’s operating expenses. The landlord pays the remainder of the operating costs. Landlords renting space in office buildings, industrial complexes and some retail spaces use gross or modified gross leases.

Net leases

Net leases typically have lower rent payments than gross leases, but tenants must also pay some operating expenses. Net leases come in the following variants, with each including more operating expenses:

  • Single-net: The tenant pays their base rent and property taxes for their specific space.
  • Double-net: The tenant pays rent, property taxes and their share of building insurance.
  • Triple-net: The tenant pays rent, property taxes, insurance, utilities and their share of the building’s remaining operating expenses.
  • Absolute triple-net: The tenant pays for all building-related expenses, including maintenance and roof or structural repairs.

Commercial real estate investors commonly use net leases because they prefer to let the tenants pay for maintenance and other operating costs and are willing to accept lower rent in exchange for the potential issues that can arise with property management.

Percentage lease

Landlords of retail spaces typically use percentage leases. The tenant pays their base rent and a percentage of their monthly sales revenue. Depending on the lease details, the landlord takes responsibility for some or all of the building’s operating costs, including property taxes, maintenance and insurance.

Percentage leases work well for seasonal businesses such as retail because they minimize the fixed rent payment and allow the percentage to vary with sales. In lean times such as slow-selling seasons or an economic downturn, the tenant’s payment remains a fixed percentage of their sales, aiding cash flow.

Commercial leases serve both landlords and tenants and negotiating the best lease for both parties can result in a long and prosperous business relationship.

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