Navigating commercial real estate leases for the first time can be a challenge, especially when considering the costs and commitments associated with this lease. But with a little more knowledge, you can get past this commitment phobia to find the best commercial lease for your business.
When exploring commercial leases, it’s important to first understand the types of commercial leases to find an agreement you’re comfortable with. To help you make an informed decision, 620nlasalle breaks down the four most common types of leases in real estate to ensure you find just the right space for your company with the best commercial office for lease.
What Is a Commercial Lease?
To start, let’s clarify what a commercial lease is.
A commercial lease agreement is a legal contract between a landlord and a tenant that shares all the details of the lease, including rules, terms, and obligations. As expected, there are several different types of leases, with commercial leases being more in-depth than the standard residential lease many are familiar with due to the sheer size of the space.
As opposed to a 10-page contract for residential tenants, commercial clients will typically be presented with a 20-30 page contract, however, this document can be even longer depending on the number of terms.
Ultimately, commercial lease agreements will include all details of the lease in writing to avoid any hiccups or confusion. This can come down to small details like who is in charge of paying for cleaning, as well as maintenance, insurance, or other considerations.
Which Lease Type Should I Choose?
Curious about the different types of commercial lease agreements? You’ve come to the right place.
Each type of commercial lease has pros and cons, and finding the right one for you involves finding the best arrangement between you and the landlord. Negotiating different types of leases in real estate involves understanding the terms and types so you know just what you can get out of your specific lease.
Take net leases, for example. These tend to be a favorite of landlords and often involve more negotiating as both sides make compromises in this arrangement. On the other hand, gross leases are of greater benefit to the tenant. With this agreement, you have more of a say on how much is spent on various services and utilities.
So, which is right for you? To help you secure the best arrangement, we share the four main types of business leases for your next office location.
Gross Lease/Full Service Lease
First is the gross or full-service lease. With this lease, the agreement includes all operating expenses in the tenant’s rent. With this in mind, the base rent will appear higher than other leases, however, this is because many expenses are accounted for within it. This means that these services and utilities will be handled by the landlord and paid for with this higher initial base rent.
Typically, a gross lease will include utilities, insurance, property taxes, and maintenance of common areas. Essentially, this means any building maintenance and operations expenses will be covered within your initial lease agreement by the landlord. This is a perk to tenants, ensuring that they do not have to worry about involvement in day-to-day building upkeep. However, these leases may sometimes include “escalation clauses” that allow for cost flexibility in the case that there’s an increase in taxes or insurance.
Next up for the different types of leases are net leases. Different from the gross lease, a net lease doesn't include property operating expenses. For this reason, the initial base rent with net leases will be lower than a gross lease, although additional costs for maintenance will come up throughout the lease, leaving more of an unknown total cost.
This highly adjustable commercial real estate lease will fluctuate based on insurance, common area maintenance, and property taxes, to name a few reasons.
There are different types of net leases, too. Let’s break down each so you understand all the options for this lease type.
Single Net Lease
With a single net lease, the tenant will not only pay rent, but pay for their utilities, maintenance, and other costs on their own. These expenses involve setting up separately metered electricity and HVAC, so the tenant pays for just their space’s use. Additionally, the tenant is required to pay part of the property taxes, a number which will be negotiated with the landlord.
Double Net Lease
A double net lease is very similar to a single net lease, however, there is another expense associated with this lease type. With a double net lease, a tenant will not only pay a portion of the building’s property taxes but for property insurance, too. Typically, the landlord will handle the cost of maintaining common areas, but the tenant will still handle their own utilities and garbage services.
Triple Net Lease or “NNN”
With a triple net lease, the tenant is responsible for paying a large portion (or all) of the taxes, insurance, and common area maintenance in addition to their base rent. Of all the types of commercial leases, this is a favorite of landlords due to the fact that many of the building expenses are covered by tenants.
Not only do landlords love it, but it also has perks for tenants too. With this lease type, tenants are often given the liberty to review the landlord’s expenses, and any savings will be returned to the tenant.
Absolute Triple Net Lease
Another model of a net lease is the absolute triple net. With this lease, a tenant takes on the responsibility of all of the building expenses. But why would anyone want this? This lease type essentially allows a tenant to own a building, without actually purchasing it. However, if there’s a major issue or change at the building, it’s up to the tenant to deal with it, no matter how high of a price.
Not sounding like such a sweet deal? No worries, this is one of the least common types of business leases.
Modified Gross Lease/Modified Net Lease
The third type of commercial lease is the modified gross lease and modified net lease. This real estate lease creates a balance between tenant and landlord, allowing for more negotiations when it comes to the additional maintenance expenses the tenant is responsible for on top of their rent. Keep in mind, the lease rate will remain the same, even in the case that costs rise or decline.
Many times, tenants with this lease will pay the base rent the first year and then tack on a percentage of operating costs in the years that follow. This is wonderful for new businesses like start-up that are still getting on their feet.
Last up is the percentage lease. With this lease type, as the name hints, a tenant pays the base rent, as well as a percentage of the monthly sales. Of the different types of leases, this one is most common in retail mall locations.
With this lease, it’s important to note that the type of business and time of year can have a major impact on the additional percentage a tenant owns. So, under this arrangement, tenants typically negotiate a lower base rent in exchange for offering a portion of their profits to their landlords based on monthly sales.
Now that you know more about the types of commercial leases, it’s time to choose the right one for your business. To narrow down your options, consider the expenses you’re comfortable taking responsibility for in addition to your rent. This is a key differentiation between the different types of commercial lease agreements and will help you understand why one base salary is higher or lower than another and what you’re paying for on top of it. And with a lot of money and a lengthy time commitment on the table, this is a decision you surely want to think through.
If you’re ready to commit to a commercial real estate lease for your business or are in search of some additional information about the types of commercial leases, contact us online today, and our team will guide you through the process.
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