When a landlord and tenant sign a commercial property lease, there’s a lot that the two parties are agreeing on — which is why there are several types of commercial property leases.
There are many expenses that come with using a piece of property. Yes, there’s the rent, but there’s also property tax, property insurance, utilities, janitorial and trash services, landscaping, interior maintenance, exterior maintenance and so on. Who is responsible for paying for what?
Different types of commercial property leases will distinguish which expenses are up to the tenant and which expenses are up to the landlord. The types of commercial property leases are not cookie-cutter, one-size-fits-all agreements, so remember that compromises can always be negotiated.
In short, there are gross leases, where the tenant pays a high base rent and the landlord uses that money to cover expenses, and net leases, where the tenant pays a lower base rent along with costs for other expenses.
But let’s take a look at some of the specifics.
A gross lease, also called a full-service lease, is basically a one-sum payment option for the tenant. The tenant pays that rent once a month, and the landlord handles things like taxes, insurance, maintenance, upkeep and other expenses.
In most circumstances, a gross lease makes life a little easier on the tenant because they have the peace of mind that the landlord is taking care of the building, and all the tenant has to worry about is running their business. It’s also nice for the landlord, who retains control over the property and doesn’t have to worry about things like upkeep being neglected.
Rent will be a little bit higher with a gross lease because the landlord is taking on so many other expenses, but some tenants will appreciate that there is only one monthly payment they have to make. It also means that their monthly payment is fixed, whereas costs for things like utilities and maintenance could fluctuate from month to month depending on the need.
Be careful though. Even though that one monthly payment covers so many expenses, a landlord might reserve the right to enforce what’s called an “expense stop,” or a maximum amount of expenses each month. If you have an extraordinary circumstance that forces you to use more electricity than normal, your landlord might temporarily increase your rent the following month to cover the costs. Read the lease carefully to determine what the expense stop is and what costs will be passed on to you.
In the case of net leases, rent will usually be a little bit lower because the tenant takes on part of the commercial property’s other expenses. There might still be some services covered by the landlord — trash collection, common area janitorial service, exterior maintenance — but a net lease isn’t an all-inclusive, one-sum cost the way a gross lease is.
What’s important to differentiate, however, are the types of net leases, as they specify what expenses the tenant must make in addition to the rent:
With a single net lease, the tenant pays rent and a share of the property tax. This share is determined based on the proportion of the tenant’s space compared with the whole property.
With a double net lease, the tenant pays rent and a share of the property tax, plus a share of the property insurance.
Then there is a triple net lease, where the tenant pays rent and a portion of the property tax, a share of the property insurance and part of the common area expenses.
Other types of leases
There are other types of leases beyond gross leases and net leases, but they’re not as common. There is always the option of a modified gross lease, which is a compromised version of the gross lease. A tenant still pays one sum that covers rent and most of the other expenses, but there might be one or two expenses that the tenant still takes on (for example, electricity).
In the case of an absolute lease, the responsibility of the property is all on the tenant. The tenant pays for rent, taxes, insurance, utilities and upkeep, as well as major projects, like if the roof needs to be replaced. It’s almost as if the business owns the property without actually buying it. This type of commercial property lease usually happens only with long-term leases with a business that has great credit. Finally, there’s what’s known as a percentage lease, which is usually reserved for retail spaces. With a percentage lease, a tenant pays rent along with a percentage of monthly sales.
Remember that leases are always negotiable. It’s important that both landlord and tenant agree on what expenses they are covering and what is included in the cost of rent. The professional experts at Murphy Commercial Real Estate can help you create the commercial property lease that’s the right fit for you. Learn more today at www.murphycre.com.