Commercial Lease Structures

by | Oct 15, 2022 | CRE Education

Committing to a commercial real estate lease can be an intimidating experience. For one, the lease length terms may extend beyond the typical 12 month lease, the overall rates are usually higher compared to residential or smaller buildings, and for those new to commercial leasing, the experience may present itself with a variety of unexpected nuances. Thankfully, there are a variety of commercial leasing options available, and we break down what those lease structures entail.

Net Lease: Net leases include a base rent component for the space, but also identify and separate out additional cost components like property taxes, insurance, common area maintenance (CAM), and other operating expenses, making it easy to see the true costs of leasing the space.

  • Single-net lease: In a single-net lease the tenant is responsible for the base rent and property taxes. The landlord takes on all other expenses outside of utilities and other services the tenant may be responsible for.
  • Double-net lease: In a double-net lease the tenant is responsible for all expenses detailed in a single-net lease, plus property insurance. The landlord is still covering the cost for common area maintenance.
  • Triple-net lease (NNN): In a triple-net lease the tenant is responsible for all expenses detailed in the double-net lease and common area maintenance (CAM) expenses. This is the preferred lease structure for landlords, but it does provide more visibility of expenses to the tenant.
  • Absolute triple-net lease: This is the most stringent version of net leases and also the most uncommon lease structure. In this structure, the tenant is responsible for all building expenses, inclusive of catastrophic damage to the building. It gives the tenant full responsibility for the building’s expenses and management without the commitment of owning the building. 

Gross Lease: A gross lease is easiest for the tenant as they pay one lump sum for their rental expenses and the landlord covers all other expenses. The base rent tends to be higher versus a net lease as the landlord is usually taking on more expenses. There are situations where a landlord may build in a flexibility clause to adjust for variable expenses (heat, air conditioning, etc.). These leases are most common for smaller spaces that don’t have separate utility metering. 

Modified Gross Lease: A modified gross lease or modified net lease is the middle ground for commercial leases. The tenant and landlord can make more customizations specific to their needs. There is also more flexibility and more room for negotiation. It is important that each party clearly understands what they are responsible for.

As mentioned, it’s best to understand and clarify any areas of confusion before committing to a commercial lease. The various lease structures can be complex and it really comes down to the terms that the landlord and tenant have agreed upon. If you’re unsure of the terms and responsibilities that you are taking on as a tenant, ask questions to ensure both parties are aware of the lease structure and its parameters. At the end of the day, the landlord and tenant should be well aware of the lease term expectations and responsibilities.

If you have any questions regarding lease structures or beyond, our team of experienced commercial real estate professionals is here to help.

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