What are the 3 types of commercial leases?

On Behalf of | Dec 22, 2017 | Blog

Commercial real estates aren’t exactly a “one size fits all” sort of deal. In fact, there are three basic types of leases you can use.

In order to decide which one is the best for your business, this is what you should know:

1. Gross leases are sometimes referred to as “full-service” leases. As the tenant, you would pay a flat monthly rate to your landlord and the landlord takes care of the utilities, taxes, maintenance and insurance costs.

This has some advantages in that you’re paying the same amount each month. However, the disadvantage is that you have less control over some things that may be important to you (like maintenance). You also run the risk of overpaying — your rent is going to be higher than other methods in order to cover those utilities and other services.

2. Net leases are generally lower. You pay a base rent plus some of the expenses like maintenance and other operating expenses. You also pay actual water, trash, electric and property maintenance fees.

Depending on how you negotiate the net lease, you may also pay your portion of the property tax on the building, a similar part of the property insurance and a share of the common area maintenance costs (CAMS) — all based off the amount of space your business takes up compared to the other tenants. These variations are called single net, double net and triple net leases.

While you get the benefit of knowing you’re only paying your share of the costs, your payments may fluctuate in ways that could be difficult for a company with tight margins to manage.

3. The modified gross lease is probably the best compromise lease available when it comes to not favoring either party.

As the tenant, you pay rent in a lump sum, which includes some of the property’s insurance, taxes and/or CAMS. Utilities and maintenance are your own to manage.

This gives you an assured rent, the landlord gets some of the basic costs covered and either of you could end up winning if those basic costs (taxes and insurance in particular) go up or down.

Keep in mind that there are other variations of these basic three leases. It’s also wise to seek legal advice on any real estate transaction, including a commercial lease, before you sign.

Source: 42 Floors, “3 Different Types of Commercial Real Estate Leases,” accessed Dec. 22, 2017