When entering into a commercial property agreement, one of the most important decisions involves the types of commercial leases you choose. Each commercial lease type allocates responsibilities and expenses differently, influencing both the landlord’s income and the tenant’s costs. Understanding your options can help you negotiate better terms and avoid costly surprises.
This guide explores the major types of commercial leases, who they benefit, and how to choose the right one for your business.
Gross Lease (Full-Service Lease)
Overview:
A gross lease is a type of lease where the tenant pays a fixed monthly rent and the landlord covers most or all of the property’s operating expenses. These typically include:
- Property taxes
- Insurance
- Maintenance
- Utilities
- Repairs
Who It Benefits:
Gross leases are tenant-friendly because the monthly payment is predictable. This lease is often used for multi-tenant office buildings where costs are easier to spread evenly.
Key Considerations:
- Simplicity: Great for budgeting.
- Limited control: Tenants may not influence how the landlord manages expenses.
- Annual rent increases often account for inflation and rising property costs.
Net Lease
Net leases shift some or all operational costs to the tenant. There are three main variations:
Single Net Lease (N Lease):
The tenant pays base rent plus property taxes. The landlord covers insurance and maintenance.
Double Net Lease (NN Lease):
The tenant pays rent, property taxes, and insurance. The landlord is responsible only for structural maintenance.
Triple Net Lease (NNN Lease):
The tenant pays rent, property taxes, insurance, and maintenance—essentially all expenses. It’s common in retail and standalone properties.
Who It Benefits:
Net leases generally favor landlords by shifting financial risk to the tenant. However, they may also benefit tenants with lower base rents and greater operational control.
Key Considerations:
- Greater transparency: Tenants know where money goes.
- Risk of fluctuating costs: Taxes and insurance can vary.
- Ideal for long-term tenants who want more say in how the property is managed.
Modified Gross Lease (Modified Net Lease)
Overview:
A hybrid between gross and net leases. Both parties share operational expenses, but the division varies by lease agreement. Often, the tenant covers janitorial services and utilities, while the landlord handles taxes and insurance.
Who It Benefits:
Tenants and landlords both benefit from the flexibility. This lease works well for growing businesses that want predictable rent with some cost-sharing.
Key Considerations:
- Can be customized to suit both parties.
- It is important to clearly define which costs are shared.
Percentage Lease
Overview:
Used commonly in retail, this lease requires tenants to pay a base rent plus a percentage of their gross revenue (typically above a certain threshold).
Who It Benefits:
Landlords benefit from the success of the tenant’s business. Tenants benefit from a lower base rent, especially in high-traffic areas.
Key Considerations:
- The landlord has a stake in the tenant’s performance.
- Tenants must disclose revenue records.
- May include a “breakpoint” to determine when percentage payments begin.
Ground Lease
Overview:
A ground lease allows a tenant to lease land from the landlord and build on it. At the end of the lease term, the improvements usually revert to the landlord.
Who It Benefits:
Long-term tenants (e.g., fast food chains, gas stations) who want to control a location without buying the land. Landlords benefit by gaining ownership of valuable improvements later.
Key Considerations:
- Long lease terms (30–99 years)
- The tenant pays all costs including taxes, insurance, and improvements.
- Useful for credit tenants with capital for development.
Absolute NNN Lease (Bondable Lease)
Overview:
An absolute triple net lease—the tenant is responsible for all costs, including structural repairs and rebuilding after a disaster.
Who It Benefits:
Investors and REITs love this because it minimizes landlord responsibilities. Tenants with stable businesses often negotiate lower rents.
Key Considerations:
- High tenant risk.
- Long-term commitment.
- Often used in sale-leaseback agreements.
Step Lease (Graduated Lease)
Overview:
The rent increases at predefined intervals, regardless of market value or expenses. It’s common in long-term leases.
Who It Benefits:
This benefits landlords needing protection from inflation, and tenants who want predictable rent adjustments.
Key Considerations:
- Predictable increases.
- Best suited for tenants with projected revenue growth.
Index Lease
Overview:
Ties rent increases to an external economic index—commonly the Consumer Price Index (CPI).
Who It Benefits:
Landlords ensure rent keeps pace with inflation. Tenants experience increases aligned with market conditions rather than arbitrary amounts.
Key Considerations:
- Economic sensitivity.
- Requires clear definition of base rent and adjustment method.
Fully Serviced Lease with Escalation Clause
Overview:
Similar to a gross lease but includes an escalation clause that allows the landlord to pass increasing costs to the tenant after a base year.
Who It Benefits:
Landlords protect themselves from rising operational costs, while tenants initially enjoy simple, all-inclusive rent.
Key Considerations:
- Know the “base year” expenses.
- Review escalation calculation method.
Choosing the Right Types of commercial leases
For Tenants:
- Understand your budget and ability to handle variable costs.
- Choose predictable leases (e.g., gross or modified gross) if you’re a small or new business.
- For flexibility and long-term control, consider triple net or ground leases.
For Landlords:
- Assess how much operational control and involvement you want.
- Triple net and percentage leases reduce financial unpredictability.
- Modified leases offer flexibility to attract a wider range of tenants.
Conclusion
Choosing the right types of commercial leases are crucial for both landlords and tenants. Each lease type has advantages and trade-offs. Gross leases provide predictability, net leases shift risk, and percentage leases reward mutual success. Ground and bondable leases offer long-term investment strategies. The best lease aligns with your financial goals, risk tolerance, and operational strategy.
FAQs
1. What are the most common types of commercial leases?
The triple net lease (NNN) is the most common in retail and single-tenant properties. It offers low base rent with tenants covering most operating expenses.
2. How do gross and net leases differ?
In a gross lease, the landlord covers property costs. In a net lease, the tenant pays some or all of those costs, depending on the lease type (single, double, or triple net).
3. What is a breakpoint in a percentage lease?
A breakpoint is the sales threshold beyond which a tenant starts paying a percentage of revenue to the landlord, on top of base rent.
4. Who pays property taxes in a commercial lease?
It depends on the lease type:
- Gross Lease: Landlord
- Net Leases (N, NN, NNN): Tenant pays taxes
- Ground Lease: Tenant pays all costs
5. Can lease terms be negotiated?
Yes. Commercial leases are typically negotiable, including rent amount, expense responsibilities, term duration, renewal options, and escalation clauses.
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