Types of Commercial Lease: Everything You Need To Know
The types of commercial lease vary depending on the property in question, and a wide range of possibilities for leasing commercial property exist.3 min read
The types of commercial lease vary depending on the property in question, and a wide range of possibilities for leasing commercial property exist. Leases represent a sizable investment on the part of a tenant, both in terms of the expenses one can expect to pay out and the long-term commitment.
The important thing for every tenant to remember, no matter how daunting the experience may seem is, that every lease can be negotiated.
Regardless of what type of property a commercial lease pertains to, they all contain a provision for the amount of rent a tenant is expected to pay. Where they most commonly differ is in the additional costs a tenant is responsible for in addition to the rent.
Single Net Lease
In a single net lease, tenants pay an agreed upon monthly rent, plus a piece of the property tax that is negotiated before execution of the lease. The landlord is then responsible for maintaining the property, while the tenant is responsible for utilities, which are set up in the name of the tenant and, in most cases, paid on a monthly basis.
Double Net Lease
A double net lease assesses two additional costs to the tenant in addition to the rent: real estate taxes and insurance costs experienced by the landlord. However, it is common in most cases that a double net lease excludes maintenance fees for property upkeep and utilities.
Triple Net Lease
This type of lease, as the name implies, requires that the tenant pay property taxes, common area maintenance fees and insurance for the property in addition to rent. One advantage to a triple net lease is that tenants have the opportunity to review their landlord’s operating expenses, and while costs may not exceed those agreed upon in the lease, should the landlord’s expenses go down, the tenant would realize the savings from lower ownership costs.
Fully Serviced Lease
This is perhaps the most common type of commercial lease entered into by a tenant. In a fully serviced lease, the tenant is only responsible for paying rent. All other expenses, which may fall under the term “gross expenses,” usually include property maintenance, taxes, and insurance costs, and are the responsibility of the landlord. Of course, the landlord usually factors these expenses into the rent. Tenants usually favor this type of lease because:
- They don’t have to worry about the daily operation of the property, such as snow removal in the winter or lawn care in the summer.
- Tenants aren’t worried about utility costs being affected by a particularly hot summer or cold winter, plus it’s easy to assess what the typical utility costs would be over the course of the lease.
- Landlords can include some variable cost provision language in a lease to account for unexpected increases in taxes or insurance, which is called an “escalation clause.” However, tenants can negotiate the terms of this clause when signing the lease to limit the amount the rent can increase.
However, any portion of a fully serviced lease can be negotiated, and a landlord may want to protect themselves from costs they cannot directly control, such as electric bills in an office space or the subcontracting of services, such as janitorial services, by the tenant. In addition, landlords can charge higher rent each year based on increases in their operating expenses.
This is perhaps the most highly adjustable commercial real estate lease. It shares some features with a double or triple net lease, but the rent can be a negotiated percentage of factors such as building occupancy or length of lease.
In this case a tenant pays a rent amount based upon a negotiated amount over a sales threshold. This might be common for tenants signing a mall or shopping center lease, where they depend on the landlord or anchor stores to bring in customers.
Modified Gross Lease
In a modified gross lease, after a year, tenants pay a pro rata share of operating expenses based on square footage.
An absolute has similarities to a triple net lease, but differs in that tenants absolve landlords from all responsibility, essentially owning the property with all the risks involved.
Land or Ground Lease
The tenant builds on the landlord’s property and at the end of the lease improvements revert back to the landlord.
When signing a commercial lease, gain as great an understanding as possible to get the best terms for your business.
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