Posted on July 29, 2019
Commercial real estate leases come in different shapes and sizes. It’s crucial for a tenant to understand the costs included in a contract and what expenses are not covered. Why? Because some common leases exclude certain expenses. These expenditures can be wide-ranging—from property insurance to janitorial services, and beyond. So, the total cost of renting a building can fluctuate according to which lease you’re signing.
To help you navigate the sometimes-topsy-turvy world of commercial real estate leases, we have compiled a list of the three most common agreements between tenant and landlord. Just know this information is not an exhaustive list of all contracts; only a guide to help get you started understanding the different leases.
Ah, the full-service lease. An appropriate moniker for an agreement that covers all (or most) of the operating expenses of a property. As you might suspect, rent that covers the majority of operating expenses doesn’t usually come cheap. And you’re right—full-service leases come with relatively high rents.
The tenant enjoys a distinct benefit: One regular rental payment without taking on additional operating costs of the property. This reduces some of the unknowns and risks associated with other agreements. Full-service leases are usually found in large, multi-tenant office buildings where it is cumbersome and complicated to divide the property’s operating expenses among varied lessees. Full-service agreements are also commonly referred to as gross leases.
Net leases fall into the following four distinct categories. Essentially, net leases require the tenant to incur some of the property’s operating costs, along with a monthly base rent. These expenses range from property taxes to regular maintenance. Each type of net lease comes with advantages and disadvantages.
Single Net Lease—Under this contract, the lessee pays the property taxes of the space being rented, along with the base rent* established by the landlord. The benefit of a single net lease is a lower base rent than a full-service agreement, while not taking on too many of the operational costs that double or triple net contracts require. The disadvantage is that they aren’t as popular as the other types of net leases, thus harder to come by.
Double Net Lease—Similar to a single net lease, but you guessed it, includes more of the building’s expenses than just its taxes. Here, tenants are responsible for paying building insurance and property taxes on top of the rent*. Lessees still benefit from a lower base rent while avoiding the risk of repairs or major maintenance expenses. Expect to see double net agreements as you shop around, as they are quite popular among all types of commercial real estate.
Triple Net Lease—Under a triple net lease, the lessee is responsible for covering the majority of the property’s expenses on top of the monthly rent*. This includes property taxes, insurance and common area maintenance. While the specifics of a triple net lease will vary between properties and landlords, know the tenant is generally responsible for paying all expenses required to ensure the full functionality of the building being rented. Be prepared to encounter triple net agreements if you’re looking at commercial properties, as they are one of the most common in the industry. The only expenses a lessee won’t be expected to cover are significant roof or structural problems.
Absolute Net Lease—Push all of the building’s expenses to the tenant. From the taxes and insurance to keep the parking lot maintained, lessees of these agreements are responsible for everything related to the property. These typically occur on single-tenant buildings in which a landlord builds the property according to a tenant’s specifications and turns it over on a long-term basis.
* Tenant may be responsible for variable costs as part of the base rent. This factor varies between properties and agreements.
The last major category of commercial real estate rental contracts is the modified gross, or modified net lease. These typically require the landlord to pay property taxes, insurance and common area maintenance. This leaves the tenant to pay utilities, interior maintenance and janitorial costs. This is where a modified gross lease and full-service agreement differ, as lessees of a full-service agreement aren’t required to pay for utilities, interior maintenance or janitorial costs. Because the landlord takes on more expenses than a traditional net lease, the rent is usually higher.
So, what are the advantages for a tenant of a modified gross lease? The landlord takes on the risk of rising operating expenses and building management—like exterior maintenance. If you’re signing a modified gross contract, expect predictable rent and know you won’t have to deal with much of the property’s maintenance.
But, like anything good, modified leases come with potential drawbacks. Some landlords may charge a premium to take on the additional expenses and inherent risks associated with these agreements.
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