We often get questions from current and prospective partners about the type of leases we use in our commercial real estate endeavors. Here is a quick look at the different kinds of leases we use with our tenants at various commercial properties in our portfolio.
In a gross lease (also known as a full-service lease), the tenant pays the property owner a fixed amount. This amount is all-inclusive for a specific period of time, which is typically a monthly installment. All expenses are the burden of the owner. This is fairly standard in the apartment units we own.
Gross Plus or Modified Gross Leases
In a gross plus situation, the tenant typically pays a base rent plus a concession for utilities or expenses (typically quoted at a cost per square foot). The key difference between this and a net lease is the fact that the “plus” is typically fixed. This is fairly standard for many of our office buildings.
You may have heard of single net lease, double net lease, or triple net lease which is sometimes stylized as NNN. In this agreement, the tenant is responsible for additional expenses. These additional expenses are generally property taxes, property insurance, a portion of or all of the operating expenses (This can range from common area maintenance to janitorial services and other operating costs). The key takeaway is that this number can vary wherein a modified gross lease the “plus” portion is usually fixed. This reduces what the landlord pays and transfers it to the tenant. Let’s quickly break down these types of commercial leases.
- Single Net Lease: the landlord collects base rent and passes on the property taxes to the tenant
- Double Net Lease: the landlord collects base rent and passes on the property taxes as well as the property insurance to the tenant
- Triple Net Lease: the landlord collects base rent and passes on the property taxes, property insurance and operating expenses to the tenant
In our standard Triple Net Lease (NNN lease), the tenant is responsible for all taxes, maintenance, and insurance associated with the overall property. This is fairly standard on retail properties.
There are other types of leases, variations, and combinations of the above. These three are the three main ones we use.
- Percentage Leases
In a percentage lease, the tenant pays their base rent and a percentage of total sales. It’s typical for this type of lease to be used in a mall or other area where the tenant would be taking advantage of high foot traffic.