Lilypads explains the 5 most common types of commercial real estate leases that will help you make an informed decision while renting a space for your business needs.
1. To simplify your payments get set for the Gross lease
Gross lease also termed as the full-service lease is the most simple leasing agreement. In this lease, the landlord is responsible for all the operating expenses. Such as property taxes, maintenance costs, utility taxes, and insurance.
The tenants are solely responsible for paying the rent. This lease agreement is typically common for multi tenant properties like office buildings and also residential properties.
It’s crucial to overview every condition and expense included in the gross lease agreement. Because you can incur additional expenses beyond your base rent after the first year of your tenancy.
Many real estate companies prefer gross leases due to their simple payment methods as they have multiple leases and portfolios. They are transparent and predictable as you know exactly what you spend as the rent is yours. For example, if the property taxes go up there is a hike in the building issues and utility expenses. But you don’t have to bother with it as the business owner will deal with it.
To sum up Gross Lease:
- Tenant’s responsibility – Only monthly rent
- Landlord’s responsibility – Property taxes, maintenance costs, insurance, utility taxes
- Where it is applicable – Office buildings
2. To remain stable in the long run go for the Net lease
In net leases, tenants are responsible for paying a part or total operating expenses along with the monthly rent. It’s quite common with single tenants and also with commercial buildings like warehouses, retail properties, industrial buildings, etc. Moreover, CRE investors who are looking for a stable source of income prefer net leases.
Net lease is further categorized into three types.
- Single Net Lease
- Double Net Lease
- Triple Net Lease or NNN Lease
A Single net lease requires the tenant to pay the monthly rent and the property taxes.
Double net lease entails paying the rental property taxes, building insurances, and monthly rents.
Starting a real estate business structure with a triple net lease or NNN lease embraces long-term investment. It involves the tenant paying the property taxes, building insurance fees, maintenance expenses along rent.
For starting your own real estate business, a net lease offers security and can be sometimes decades-long.
To sum up Net Lease :
- Tenant’s responsibility – Monthly rent, utility expenses, property taxes, operating taxes, insurances, and maintenance charges.
- Landlord’s responsibility – The other proportion of the expenses (if applicable)
- Where it is applicable – Any type of commercial space
3. To hit the retail market go with the Percentage Lease
Percentage leases are most common among the retailers and restaurant tenants. It involves the tenant paying the base rent including the percentage of gross profit while conducting the small business.
For example, a retailer leases 4,000 square feet and pays $5 for each square foot as monthly rent. Furthermore, the retail tenant made the lease mentioning to give 7% of additional sales if the gross sale exceeds $100,000.
One upside of percentage lease is that the base rent is comparatively lower than other leases. Since the tenants agree to pay a portion of the specified revenue, the real estate agents also get benefited.
To sum up Percentage Lease :
- Tenant’s responsibility – Monthly rent plus a certain percentage of the revenue.
- Landlord’s responsibility – Total or a part of the property taxes, insurances, and maintenance fees.
- Where it is applicable – Retail space
4. To stop excess expense and generate a variable cash flow get set with the Modified Gross Lease
Modified Gross lease lies in the middle of gross lease and net lease acquiring the characteristics of both the leases. In this lease, the tenants have to pay the base rent along with the utility expenses and a certain portion of operating expenses.
In the real estate industry, several negotiations take place between the landowner and the tenants in modified gross leases. For example, suppose a tenant leases a 10,000 square-foot area in a 100,000 sqft building. The gross expenses of that property are $1 million and the tenant’s pro-rata share of expenses is 10% of the gross income. Hence, the tenant’s 10% share would be equivalent to $100,000. Thus, as the utility expenses, the tenant must pay $1 per square foot of that property.
It’s quite advantageous for real estate investors since it helps the real estate brokerage to anticipate cash flow over time. And it’s also comparatively less expensive than gross lease.
However, tenants must be prepared for unexpected financial risks due to unexpected costs.
To sum up Modified Gross Lease:
- Tenant’s responsibility – Monthly rent along with a portion of operating expenses
- Landlord’s responsibility – The remaining portion of the operating expenses
- Where it is applicable – Any commercial property
5. To find a lucrative way of investment go for the Absolute NNN lease
An Absolute NNN lease rather known as a bondable lease, it’s an agreement between the commercial landlords and the tenant. The agreement says that the tenants are responsible to bear all the expenses of the property along with the monthly rent. All the expenses include the property taxes, insurances, operating costs, and maintenance costs (including the structure and the roof).
There is a big distinction between a triple net lease and an absolute NNN lease. That is triple net lease doesn’t include the repair costs of structure and roofs whereas an absolute NNN lease does.
The owner of the property management is not responsible for any building costs. Tenants with national or regional footprints or with excellent credit are supposed to go forward with this lease. Absolute NNN lease is quite rare.
An Absolute NNN lease generally goes with a sale-leaseback arrangement. For example, Taco Bell in Oklahoma is a bright example of an absolute NNN lease that is exclusively for sale. It’s an Absolute NNN leased property of over 15 years with zero responsibilities of the landlord.
To sum up Triple Net Lease:
- Tenant’s responsibility – Gross building expenses along with the maintenance and repairs of roofs and structures.
- Landlord’s responsibility – No responsibility at all.
- Where it is applicable – For tenants applicable for long-term leases.
Negotiating and leaving no stones unturned before selecting the right lease
While evaluating your networking events it’s crucial to look over all the expenses other than the base rent. Thus, to run your business smoothly you can consider forming a limited liability company LLC.
Thus, before entering a commercial deal, make sure you run a market analysis on the different types of properties and consult a professional to better understand the clauses of commercial real estate leases.