May 27, 2015

The 3 Kinds of Commercial Real Estate Leases

You're ready to invest in commercial real estate.Before diving in head first, there are a few things you'll want to get down:

To that list, you'll want to add another item: understanding the three basic kinds of commercial real estate leases. Sure, a broker will be able to guide you through those conversations, but your process will go a lot smoother if you have a foundation of knowledge going in.In a nut shell, there are three types of commercial real estate leases. The way they're determined stems from two rent calculation methods:

  1. Net: a smaller base rent, but the tenant pays for expenses.
  2. Gross: a lump sum of rent. From this, the landlord pays out his/her expenses.

Type 1: Net Lease

Again, the net calculation has a lower entry point than a gross-type lease, but has other costs associated with it. These are the expenses that come with general operations and property maintenance that the landlord pays.There are a few variations of Net Leases (each has varying degrees of stake held by tenants):

  • Single Net Lease: each tenant pays rent along with a share of the building's property taxes along with utilities and janitorial services. This is usually determined by the amount of total space leased by the tenant. All other building expenses in this case are handled by the landlord.
  • Double Net Lease: in this case, tenants are responsible for base rent, their designated share of property taxes (again, based on how much space they're leasing) and property insurance. Structural repairs and common area maintenance are handled by the landlord.
  • Triple Net Lease: tenants pay for the three nets associated with commercial real estate: property taxes, insurance and common area maintenance costs. For example, if you're a tenant who leases 2,000 square feet of a 20,000 square feet building then you'd be expected to pay 10% of the total build's taxes, insurance and common area maintenance.

Type 2: Gross Lease/Full Service Lease

In this case, rent includes everything including janitorial and utilities. The landlord pays taxes, insurance and common area maintenance from the total rent paid by tenants.All building responsibility is on the landlord.

Type 3: Modified Gross Lease

Summed up, a modified gross lease requests rent in one lump sum, but includes compensation for taxes, insurance and common area maintenance.Overall costs handled by the landlord don't directly flow through to tenants. So for instance, if the landlords overall taxes, insurance and common area goes up in cost, tenants don't feel it. If those costs go down then the landlord is experiencing savings.

Have questions about the various kinds of real estate leases? Get in touch with us.

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