Different Kinds of Commercial Lease Types

Focus: Net Leases

When you are finally ready to lease space for your business, it’s always a good idea to fully understand the kinds of leases available to you. Commercial leases are not one size fits all, therefore it’s important to find the lease option that works best for you and your business.

Looking at commercial leases may seem overwhelming, but this basic guide will give you a head start on what you should be looking for and how to find the right space for your business’ bottom line.

Gross Lease (Full Service Lease)

Rent Basis: Base Rent

Commonly used in: Office and some retail

Single & Double Net Leases (Modified Gross)

Rent Basis: Base rent + some (or all) taxes, insurance & maintenance

Commonly used in: Any commercial lease

Triple Net Lease (NNN)

Rent Basis: Base rent + taxes, insurance & maintenance

Commonly used in: Majority of commercial leases

Percentage Lease

Rent Basis: Base rent + percentage of monthly sales

Commonly used in: Retail businesses

 

Now, that we have covered the basics of the different types of commercial leases, let’s dig a little deeper into 3 kinds of Net Leases.

 

The Single Net Lease (Modified Gross)

The single net lease is the simplest type of Net (N) Lease and regularly referred to as a Modified Gross Lease. The tenant (renter) will pay the base monthly rent, utilities, and (commonly) the property taxes. The landlord is responsible for all other expenses including maintenance, insurance, etc. These are uncommon in commercial real estate.

 

The Double Net Lease

In a double net (NN) lease, (also commonly referred to as a Modified Gross lease) the tenant is required to pay a base rent, property taxes, AND insurance. Insurance for multi-tenant properties can be split and shared. Since the tenant is taking on more financial responsibility, you can typically negotiate a lower base rent. This is a common commercial lease structure. Typically, property taxes and insurance rates are still paid through the landlord (same as the rent) to ensure that no payments are late or missed entirely.

 

Benefits & Disadvantages: Landlord vs. Tenant

Single Net & Double Net Leases

Benefits to Tenant:

1. Lower monthly base rent
2. Does not have to pay insurance or maintenance costs

Disadvantages to Tenant:

1. Monthly payments vary due to seasonal changes (more heating vs. air conditioning)

Benefits to Landlord:

1. Protected against rising or wasteful utility costs
2. Disadvantages to Landlord:
3. Higher operational costs for building maintenance, insurance, etc.

 

	Base Rent	Utilities	Property Tax	Total Monthly
Tenant A	$1550	(+-) 200	$150	(+-) $1900
Tenant B	$3000	(+-) 350	$300	(+-) $3,650

 

Keep in mind that property taxes are commonly appraised and raised yearly, resulting in higher monthly payments year-over-year. Of course, this depends on the landlord and whether he requests a yearly appraisal or not. If he does not, this may be good for the tenant, not ideal for the landlord since he will have to front the bill of the higher property taxes once the tenant moves out.

 

The Triple Net Lease

Last, but certainly not least, is the triple (NNN) lease. This is one of the more commonly used and talked about leases. In addition to the base rent, the tenant also pays property taxes, insurance and maintenance, often referred to as CAMs (Common Area Maintenance). Again, these are shared costs between the tenants in a multi-tenant building and relieves the landlord of tenant/business specific costs, such as high electricity usage, heating, air conditioning, etc.

The NNN lease is primarily used in multi-tenant industrial, industrial and many retail leases. The advantage to the tenant is that NNN leases typically have lower base rents, which could be preferable if the building is newer and does not need consistent work or upgrades. Keep in mind that because maintenance and property taxes are variable, month-to-month expenses will vary as well.

If we are examining the same property (same space, same SF) as the above example as a NNN lease, here’s what your monthly payments would look like.

	Base Rent	Property Tax	Insurance	CAM	Total Monthly
Tenant A	$1350	$150	$250	$400	$2,400
Tenant B	$2700	$300	$500	$800	$4300

 

As you can see, the base rents went down in the NNN lease, but are offset by the other financial responsibilities like CAMS and insurance.

 

Benefits & Disadvantages: Landlord vs. Tenant

Single Net & Double Net Leases

Benefits to Tenant:

1. Lower base rents (lowest of all the lease types)
2. More control over monthly costs
3. Disadvantages to Tenant:
4. Variable monthly payments due to low vs. high maintenance costs

Benefits to Landlord:

1. Lower operational costs since tenant pays CAMs, Insurance, etc.
2. Protected against rising/wasteful utility costs
3. Lower base rents makes it easier to find tenants

Disadvantages to Landlord:

1. Must take on financial responsibility if tenant damages building without reporting it to landlord

 

 

commercial leases, commercial real estate, net leases, nevada real estate, reno, reno real estate, types of commercial leases