You’ve found the perfect space for your new business- now it’s time to sign your lease. A commercial real estate lease is an agreement between a landlord and the tenant and there are a few common types of CRE leases. While there are multiple types of leases, the rules are not absolute. Not all leases are created equal and in some cases they can be negotiable.
It is important to understand the ins and outs of your lease, so that you know how it will affect your business and your bottom line. The best tip is to study your lease before you sign it and work with your broker or attorney to negotiate a lease that suits your business.
Let’s take a look at each of the types of leases-
Gross Lease (Full-service)
In a gross lease, the rent is all-inclusive. The landlord pays all or most expenses associated with the property, including taxes, insurance, and maintenance out of the rents received from tenants. The landlord assumes all responsibility for the building.
A gross lease allows tenants to accurately forecast their business expenses.
Modified Gross Lease
Like a Gross Lease, the rent is a flat fee and is fixed. However, the flat fee includes a portion of the tenant’s property taxes, CAM, or property insurance.
In a net lease, the landlord charges a base rent and covers some or all expenses associated with operations, maintenance, and use. These expenses can include real estate taxes, property insurance, and common area maintenance items (CAMS), which include janitorial services, property management fees, sewer, water, trash collection, landscaping, parking lots, fire sprinklers, and any commonly shared area or service.
Landlords typically estimate expenses and charge tenants a portion of these expenses based on their proportionate, or pro-rata share. For example, a tenant who leases 2,000 square feet of a 20,000 square foot building would pay 10% of the building’s taxes, insurance, and CAM.
There are a few types of net leases:
Net Lease (N Lease)
In this lease, the tenant pays base rent plus a share of the building’s property tax, based on the proportion of total building space leased by the tenant. The landlord covers all other building expenses.
Double Net Lease (NN Lease)
The tenant is responsible for base rent plus a share of property taxes and property insurance. The landlord covers expenses for structural repairs and common area maintenance.
Triple Net Lease (NNN Lease)
A Triple Net Lease is the opposite of a gross lease, however this is the most popular type of net lease for commercial real estate. The tenant pays monthly rent and a proportion of three “nets”–property taxes, insurance, and CAMS (common area maintenance). Tenants also pay the costs of their own occupancy, including janitorial services, utilities, and their own insurance and taxes.
Tenants carry all real estate risk – they pay rent and all building expenses, including roof and structural repairs for the building.