Types Of Commercial Real Estate Leases

Posted on

The commercial real estate market allows you to buy and lease a property. In the lease-to-use strategy, a business owner rents space in a commercial building for a specified duration. This arrangement is usually formalized using a lease agreement. Negotiating lease agreements can be a complex task, especially if one does not understand the jargon, terms, and condition of different contracts. Below are the main types of lease agreements for commercial real estate properties. 

Full-Service Leases

A full-service lease is also referred to as a gross lease. Typically, the landlord will take care of all the property's operating expenses, and the tenant pays the base rent. Operating expenses include maintenance costs, property insurance, and taxes. A full-service lease is ideal for the clients since they do not have to get involved with the daily operations of the commercial real estate building. Rent is fixed even when expenses change. Ordinarily, the rent is usually high for these leases since the landlord takes all the risks associated with changes in operating expenses. Notably, landlords often deal with expense variability by including an escalation clause in the contract to increase rent. 

Net Leases

This lease dictates that the tenant pays a portion of the operating expenses on top of the monthly base rent. There are three main types of net lease agreements for commercial real estate properties. In a single net lease, the tenant pays one of the operating expenses like property insurance or taxes. Then the tenant caters to two of the three main operational expenses in case of a double net lease. The triple net lease is the exact opposite of the full-service lease in that the tenant pays both the base rent and all operating expenses. Ultimately, net leases allow the landlord to shift one or all of the operating costs to the tenant. 

Modified Gross Lease 

A modified gross lease agreement allows the landlord and the tenant to cost-share the operating expenses associated with commercial real estate property. Typically, the tenant only pays the base rent in the first year, while the landlord caters to operating costs. Then, the tenant pays a portion of the operating expenses after the first year. As such, this agreement falls in between the full-service and net leases with benefits to both parties. 

Percentage Lease

This lease is popular in commercial retail properties like shopping malls. The retail tenant pays a base rent based on space rented and a pre-determined percentage of their monthly or annual gross sales. The landlord uses strategic location as the bargaining power for a percentage lease. 

Navigating through commercial real estate leases is not easy. With the correct information, one can select a lease agreement that better meets their short-term and long-term need to use commercial property.