By Kris Lindahl
Commercial real estate leases are vastly different than those used for residential properties. While a residential lease is typically a pretty straightforward matter with the tenant being responsible for the rent, as well as any utilities, commercial real estate leases are typically determined by the type of commercial business. Four of the most common types are outlined below.
1. Gross Lease
Sometimes also referred to as a full-service lease, a gross lease is one in which the landlord is responsible for paying for the insurance, taxes and maintenance of the property. In most cases, the landlord collects a fixed amount from each tenant and pays the expenses noted above from it. Many gross leases also contain escalation clauses that build in rent increases over time in an effort to offset the higher landlord costs that are projected in the future.
A gross lease is the ideal choice for industrial properties, as well as single- and multi-tenant office buildings. Accountants, attorneys and some types of consultants would also find a gross lease to be a good fit. Prior to signing a contract on a gross lease, however, it’s a good idea for the tenant to be able to project their rent expenses in the future given the presence of the escalation clauses and avoid any surprise rent increases.
2. Triple Net Lease
A popular commercial real estate lease option that is often found in use for those retail and industrial properties that have multiple tenants, a triple net lease works for the landlord when renting to those businesses whose expenses fluctuate widely. The bulk of the expenses associated with operating the property is placed squarely on the tenants.
Because businesses such as manufacturing plants, auto repair shops and other commercial ventures that are utility-heavy and/or tend to be harder on the structure, the triple net lease is the ideal choice for the landlord.
Tenants, on the other hand, need to be more vigilant about their expenses to ensure that their costs don’t spiral out of control. Tenants that rent space in older buildings might find that their utility and maintenance bills are higher because the building needs to be renovated due to its age.
3. Percentage Lease
A percentage lease could be the ideal fit for those commercial tenants whose sales fluctuate a great deal depending on the time of year and other economic factors. This type of lease works by the tenant paying a base rent, as well as an additional percentage that is determined by their monthly sales volume.
Ideal for a retail business that must rely on much of its sales around a season such as the holidays or summer to stay solvent, a percentage lease doesn’t mean that the landlord is entitled to all of the company’s earnings. In fact, because the landlord only gets a percentage of the sales volume once a certain threshold is met, this type of lease is ideal for businesses located in a mall setting or whose sales vary over time.
4. Modified Net Lease
The modified net lease can be described as a compromise between a triple net lease and a gross lease. It leaves more room for negotiations between the tenant and landlord with the maintenance expenses typically being split between them in some fashion. Utilities are another aspect of a modified net lease that is likely to be split between the two entities.
That being said, with a modified net lease, the tenant is typically responsible for paying taxes and insurance, along with their rent. Modified net leases are a popular compromise for those commercial businesses that have high expenditures for utilities. Older buildings that require more and higher maintenance costs are another good candidate for a modified net lease.
The above overview of the most common commercial real estate leases gives tenants a starting point when finding a good fit for their business. Reading over a proposed contract carefully before signing provides clear expectations for both parties.
Minnesota real estate broker Kris Lindahl’s “All In” approach to life is key to success in his career as a leading real estate professional. His energy and devotion are a perfect fit for the lighting-fast pace of today’s real estate industry.
Featured image via Flickr CC: Travis Wise