Understanding Different Types of Leases in Commercial Real Estate

Understanding the different type of leases in commercial real estate is crucial for anyone looking to rent or lease a commercial property. Each Lease type comes with its own set of terms and conditions, which can significantly impact your business operations and financial commitments. In this post, we will decode the various type of leases commonly found in commercial real estate.

Gross Lease

A gross lease, also known as a full-service lease, is one where the landlord covers most, if not all, of the property expenses. These expenses can include property taxes, insurance, and maintenance costs. The tenant pays a fixed rent amount, making it easier to budget for monthly expenses.

Tenants who want to avoid unexpected costs often preferred this type of lease. However, the rent amount is usually higher to compensate for the landlord's additional responsibilities.

Single Net Lease

In a single net lease, the tenant pays the base rent plus property taxes. The landlord covers other expenses like insurance and maintenance.

Double Net Lease

A double net lease requires the tenant to pay the base rent, property taxes, and insurance premiums. The landlord remains responsible for maintenance costs.

Triple Net Lease

The tenant pays base rent plus property taxes, insurance, and maintenance. This type of lease is popular because it minimizes the landlord's responsibility for property expenses.

Pros for Landlords:

Reduced financial responsibility
Potentially higher net income
Cons for Tenants:

Higher and potentially variable costs

Modified Gross Lease

A Modified gross lease is a hybrid between a gross lease and a net lease. The tenant and landlord agree to split some of the operating expenses. Typically, the tenant pays base rent plus a portion of specific expenses such as utilities, while the landlord covers the rest.

Pros:

Flexibility in cost-sharing
Predictable base rent with partial control over expenses

Cons:

More complex negotiations and lease agreements

Percentage Lease

In a percentage lease, the tenant pays a base rent plus a percentage of their business's gross income. This type of lease is common in retail properties, where the landlord benefits from the tenant's success.

Pros for Tenants:

Lower base rent for a share of profits
Landlord is incentivized to support tenant’s business

Cons for Landlords:

Income can be variable depending on tenant’s performance

Ground Lease

A ground lease involves leasing the land only, allowing the tenant to build on the property. At the end of the lease term, ownership of the improvements typically reverts to the landlord. Ground leases can be long term, often ranging from 50 to 99 years.

Pros for Tenants:

Opportunity to develop property without purchasing land
Lower initial investment
Cons for Tenants:

Improvements may revert to the landlord at the end of the lease
Long-term commitment

Absolute Net Lease

An absolute net lease is similar to a triple net lease but with even more tenant responsibility. In this lease, the tenant is responsible for all property-related expenses, including structural repairs. Absolute net leases are often used for single-tenant buildings leased to creditworthy tenants.

Pros for Landlords:

Virtually no property-related expenses
Stable, long-term income
Cons for Tenants:

High level of responsibility and risk

Conclusion

Selecting the right type of lease is crucial for both landlords and tenants in commercial real estate. Each lease type offers different benefits and risks, tailored to meet specific financial goals and risk tolerances. At Atlantic Commercial Lending, we are here to help you navigate these options and find the best solutions for your CRE investments. Contact us today for expert advice and personalized service in commercial lending and leasing.