Most businesses these days prefer to lease rather than own. There are many reasons behind this, one being cost-effectiveness. Commercial leases are signed for longer terms, considering the importance of staying put to ensure easy serviceability. Though commercial leases have a predictable monthly rent, there are some variations to this. Understanding the various types of leases is crucial when you approach a real estate consulting firm for setting up your business in an area of your choice.
Let’s see what are the different types of commercial leases
Full Service/Gross lease
Here, the tenant pays a fixed sum every month as rent while the landlord pays other real estate expenses like maintenance fees, insurance, real estate taxes, and other building expenses. In most cases, the tenant has to pay a fixed rent. However, some gross leases also contain a ‘load factor’ built-in where the tenant uses certain services that come with the lease. These are called ‘common area factors’ or ‘add-on factors’. For instance, the tenant may pay for utilities such as air conditioning or common janitorial services.
In certain leases, the onus of payment for such common area factors may be on the landlord while the tenant may be responsible in other cases.
A full-service lease is usually preferred by most tenants as a single, predictable amount is to be paid each month. However, the rent could be higher as the landlord factors all of these add-on factors in the rent agreement.
This is somewhat of an adjustable commercial lease. Here, the tenant is expected to pay for some if not all other operating expenses along with a base rent. How much and which expenses the tenant will pay depends on the negotiations between the landlord and tenant. Usually, there are 3 types of net leases-
Single Net Lease-
In such a lease, the tenant pays the basic rent, property taxes, and utilities while the landlord pays for general maintenance expenses and insurance.
If the property has multiple tenants, the property taxes are divided on a pro-rata basis. This is based on the rentable area each tenant occupies. There could be arrangements made for commercial spaces with special characteristics, like a storefront or a garage.
In comparison with a gross lease, single net leases will have a comparatively smaller portion of rent. However, it is on the higher side as compared to other types of net leases.
Double Net Lease-
Here, the tenant is expected to pay a base rent, a share of the property tax as well as insurance premiums. Displayed as a ‘NN’ in property listings, here, the landlord is responsible for the maintenance of the property’s Common Area Maintenance or CAM. This includes maintenance and repairs of the elevators, restrooms, lobby, stairwells, and hallways along with the salaries of the security guard and lobby attendants. As is with single net leases, the property taxes are divided between the tenants on a pro-rata basis or another basis based on the situation. Commercial Rental Properties with double net leases have competitive rental rates.
Triple Net Lease-
In such an arrangement, the tenant is responsible for his own space. That means he has to pay the base rent, property taxes, utilities, maintenance expenses, and building insurance. Some rent agreements also specify the tenant to pay for major structural expenses.
As the tenant has to pay for almost all of the property’s expenses, the base rent is lesser than other forms of rent. Common expenses like property taxes are split evenly (on a pro-rata basis) between multiple tenants. Though this arrangement seems friendly to landlords, the tenants also benefit as they are paying not only for the property but also additional costs that would have been the responsibility of the landlord.
Modified Gross Lease
This is a mix between a gross lease and a net lease. Here, the tenant pays the basic rent, utilities, and a portion of the operating costs. The tenant pays a certain percentage of the operating costs. The sum of all the operating costs is taken into consideration for this payment.
Many people consider this as a ‘middle ground’ taking into consideration the interests of both landlord and tenant.
A model used in shopping malls, where the tenant has to pay a percentage of sales to the landlord besides a basic rent. These types of rental agreements are also used in premium retail locations where there are high footfalls. Usually, the percentage of rent is less than or equal to 7% of sales.
Each lease is negotiable
Commercial leases give you a lot of flexibility to negotiate. Nothing is permanent till you sign the rental agreement. If you have no idea of the current market rates, it makes sense to avail of commercial real estate services that will help you get the best deal.
Landlords choose a commercial lease type based on the nature of their properties. Though there might be some fluctuations in the rent you have to shell out, the base rent remains more or less the same. What also matters is whether you are availing of any other services of the property besides the rentable area. You can even change the type of lease based on your requirement. After all, there is always room for negotiations when you finalize a commercial property.