Commercial Real Estate Lease Types
One of These Commercial Real Estate Leases Might Work for You
A good landlord/tenant match in commercial real estate requires a lease that benefits both sides. Landlords need income from rent and they have to control costs to assure a profit. Tenants want to peg their rental costs as closely as possible to manage their own profits and losses.
A retail business can have seasonal or other factors that influence sales quite a bit over the course of a year, and these businesses require leases that accommodate that. Manufacturing, industrial, or machine-intensive businesses are heavy utility users, and they also tend to be harder on the structure and facilities. Offices with a steady business flow prefer to pay the same way as residential leases.
Residential leases are far simpler—the tenant typically pays their rent and their own utilities, with the exception of sewer and maybe water or trash. But there are many more considerations in commercial leases. A variety of leases can fit one or more situations to accommodate the nature of the business.
The gross lease is similar in many ways to a full service lease, which typically involves the landlord picking up the cost of almost all operating expenses, with the possible exception of telephone and data transmission.
A gross lease might fit an attorney, consultant, or accountant because it's a fixed monthly amount and possibly payment of utilities, but not other expenses such as building maintenance or operation.
This isn't to say that costs aren't passed onto these tenants, however. Additional costs are often referred to as the "load factor." Rent would be substantially less if this load factor wasn't included.
The load factor is typically a percentage of costs associated with maintaining common areas, such as a lobby, and the percentage is commensurate with the percentage of the overall building that the tenant occupies as his own premises.
A triple net (NNN) lease requires that the tenant pay a significant share of the expenses of the operation. This type of lease helps the landlord by fixing costs, but tenants aren't fond of it, especially with older properties.
A triple net lease is different and separate from a double net lease, which typically only requires that the tenant pay base rent plus taxes and insurance. The triple net lease adds a third cost: maintenance. An "absolute lease" is the far extreme, typically passing financial responsibility for the entire building onto the tenant.
Some businesses such as auto repair shops and major manufacturing plants are heavy utility users, and these can be costly tenants for a landlord. Most landlords prefer a triple net lease in this case. The parties might potentially agree on a modified net lease if the tenant balks.
Also sometimes referred to as a modified gross lease, the modified net lease is a compromise between a gross lease and a triple net lease. It can be quite helpful in assisting landlords and tenants to structure lease terms that work for both of them.
Tenants typically pay just base rent in the first year, then a percentage of operating costs in subsequent years. This can be particularly beneficial for new businesses that need a year or more to achieve profitability.
A percentage lease typically requires that the tenant pay base rent plus an additional percentage of monthly sales volumes. Percentage leases are commonly executed in retail mall outlets.
The location and nature of the business can have a dramatic impact on percentage rent. For example, a Christmas store owner won't make nearly as much money in the summer as in November and December. This tenant would prefer low lease payments in slow months and would be willing to pay more when money is flowing.