A Guide to Types of Commercial Leases
If you’re currently searching for “commercial property for lease near me,” it is crucial that you understand the different types of commercial leases that are in use. The lease terms will dictate the relationship between Landlord and Tenant, so you want to ensure that your lease protects you and includes all of the most appealing provisions.
Below, experienced commercial real estate broker Arthur Nachman breaks down the different types of commercial leases, explaining which type of commercial lease is the most common, the differences between each type of lease, and how he can help.
What Is the Most Common Type of Commercial Lease?
Most commercial leases are either “gross” leases or “net” leases.
Gross Lease vs. Net Lease
A gross lease is the most common type of lease for residential purposes. The tenant is generally only responsible for the payment of rent and utilities, and the landlord is responsible for all other costs of ownership unless otherwise stated in the lease. In a gross lease, the property owner is responsible for repairs, insurance, property taxes, and maintenance.
If the owner is marketing a commercial property for lease, a net lease may be used instead. A net lease is a legal contract that leases commercial real estate to a tenant but requires the tenant to pay some of the costs usually associated with ownership, such as:
- Retrofitting (Buildout)
- Property taxes
Many commercial real estate owners prefer using commercial net leases because the burden of expenses falls to the tenant, thereby decreasing their relative risk and cash flow obligations. As a result, they are particularly appealing to real estate investors who want to benefit from the commercial lease financially but want to minimize the work of maintaining the property.
Tenants also often benefit from net leases because the rent tends to be lower than gross leases because they factor in the additional costs associated with the lease. Rent Escalations are based on an increase over the base rent instead of the gross lease amount. However, when a landlord has a gross lease in place, the monthly rent payment is usually higher because the landlord assumes all property ownership and management responsibilities.
What Are the Types of Commercial Net Leases?
There are primarily four different types of commercial net leases:
Single Net Lease
A Single Net Lease or “N lease” only requires that the tenant pay property taxes in addition to their rent, thereby transferring a minimal amount of risk to the tenant. The landlord is responsible for paying other expenses associated with the property – like maintenance, repairs, insurance, and utilities. The tenant pays the tax payments directly to the landlord, who is still technically responsible for paying them to the proper municipality. This type of commercial net lease is not very common.
Double Net Lease
A double net lease or “NN lease” requires the tenant to pay rent, property taxes, and insurance on the property, in addition to the base rent. The owner pays the costs of repairs and maintenance to the Roof, Structure, and Capital repairs to the parking lot.
Double net leases are often part of deals with multi-tenants when a building houses more than a single tenant. Each tenant might have a separate double net lease with the landlord. Typical uses of double net leases are for:
- Shopping malls
- Strip malls
- Office buildings
- Healthcare centers
- Apartment and other multi-housing complexes
Triple Net Lease
Triple net leases or “NNN” are the most common type of commercial net leases. Under this arrangement, the tenant pays rent, property taxes, insurance, and other property expenses, including maintenance and repair costs. If you hear the term “net lease,” this arrangement is what is usually thought of.
Under this lease agreement, the landlord has the least amount of financial responsibility to the property. Rent tends to be lower to compensate for all additional expenses the tenant will incur.
This type of lease is more common when a single tenant is solely responsible for all property expenses. In addition, these types of leases are often for long durations, such as ones that are for ten or more years.
Businesses that often enter into triple net lease agreements include:
- Companies that need one large area for office space
- Fast food restaurants
- Large retail stores
- Boutique shops
- Educational centers
- Convenience stores
- Gas stations
Modified Net Lease
The fourth type of commercial net lease is a modified net lease, a hybrid of a triple net lease and gross lease. In this lease, the tenant’s additional expenses are negotiated to suit the landlord’s and tenant’s needs.
Negotiating Your Net Lease
A net lease can provide considerable benefits to commercial real estate owners, but only if they are properly negotiated and structured. Tenants have a right to negotiate the terms of the commercial net lease, too, so you must have a strong understanding of what information to include in the lease. Some provisions that may be included in a commercial net lease include:
Statement regarding additional expenses – At the core of a commercial net lease is shifting the burden of responsibility of costs like taxes, insurance, maintenance, and repairs to the tenant. This provision should provide clear information and expectations about the payment for these expenses.
Caps on payments – Tenants may want a cap regarding the maximum they will be required to pay. This can help landlords, too, so they have a realistic expectation of the costs and minimize a tenant’s concerns about mounting expenses.
Rent increases – The landlord may also want to include a provision regarding when rent can be increased.
Lease term – Commercial net leases are often for longer terms than other types of leases. There may also be a provision regarding how to renew the commercial lease.
Payment terms – The tenant should know where to pay rent and when and how to pay for other expenses.
Contact Arthur Nachman for Help
If you need assistance in finding suitable commercial real estate, want to negotiate a commercial net lease, need to complete a letter of intent to lease commercial property, or are wondering how to get out of a commercial lease, Arthur Nachman is here for you. As one of the most experienced commercial real estate brokers in Virginia and as a commercial real estate investor himself, Arthur can help you with every aspect of your commercial net lease arrangement, from finding a suitable property to negotiating commercial lease renewals. Contact him today for expert assistance and guidance.