When it comes to commercial real estate you will find there are three different types: gross lease, net lease, and modified gross lease. Each lease is different and are appropriate for various situations. You will find though, that each lease is similar in that they provide base rents with variations around who is paying for operational expenses. Check out the breakdown of each lease here:
Gross Lease/Full Service Lease
The tenant will cover the properties full operating expenses in a gross lease. You’ll see things like utilities, property taxes, and maintenance already being included in the rent. The landlord will pay for these expenses using the rent the tenant owes. Typically, with a gross lease the rent will be on the higher end of the cost spectrum, however, there won’t be any added cost seeing that those are already included in the rent price. This type of lease tends to be preferred as the rent is fixed even though the expenses may vary by month. Some landlords will include clauses in the lease that allow for flexibility of the rent due to possible increases of taxes or insurance.
There are four types of net leases, making it a highly flexible commercial real estate lease. The tenant will pay fixed operating expenses such as property taxes, insurance, etc. However, the base rent will be lower than that of a gross lease.
It begins with a Single Net lease. The tenant will pay a set rent and property tax which would be negotiated with the landlord, as well as utilities and other services directly. The landlord will be responsible for building expenses.
Similar to the Single Net lease, the Double Net lease involves the tenant paying part of the property insurance along with the property tax. The landlord will take of common area cost but the utilities are the responsibility of the tenant.
One of the most common types of leases is the Triple Net Lease. On top of their base rent, the tenant will pay for all or part of property taxes, common area maintenance, and property insurance. This lease is favorable to landlords but also gives the opportunity for the tenant to review operating expenses and save money.
If one is to sign on an Absolute Triple Net Lease, you are probably better off purchasing your own freestanding building. This lease is the triple net lease magnified. One positive of this lease is you essentially own the property upright, without purchasing it. However, if any type of catastrophe happens to the building, you are on your own. This is the most uncommon type of lease for that reason.
Modified Gross Lease
This lease offers the most middle ground between landlord and tenant. Otherwise known as the modified net lease, you can expect a broader range of negotiations allowed when it comes to things like operating expenses. Both parties will agree to terms that will determine the base rent. However, the lease rate will remain fixed regardless of if costs increase or decrease.