Types of Commercial Leases: Weighing the Pros & Cons

Navigating the landscape of commercial leases can be a daunting task, with each type of lease bringing its own set of implications for the financial health and operational flexibility of your business. Understanding the major types of commercial leases is vital to securing the best possible deal that aligns with your business objectives. These leases vary significantly in terms of the expenses you'll be responsible for and how your rent is calculated, affecting everything from your monthly budgeting to long-term strategic planning. 

Gross Lease or Fully Serviced Lease

A gross lease charges the tenant rent for the premises. The landlord is responsible for the remaining costs, including taxes, insurance, and maintenance. Office space, retail space, and some industrial landlords use a gross lease. 

A gross lease allows you to know what your rent will be, and the rent remains constant or may increase on a set schedule. A gross lease may be more costly than a net lease, benefiting the landlord. There are advantages and disadvantages to a gross lease, and you will need to consider your business needs to determine whether a gross lease is right for you.  

Percentage Lease

A percentage lease is popular for use in retail spaces, especially in mall spaces. A percentage lease charges a base rent plus a percentage of the monthly sales above a set amount.  

Modified Gross Lease

A modified gross lease specifies that the landlord and tenant share some of the property’s operating expenses. Market conditions and negotiated terms determine who is responsible for specific costs. It is always essential to read and understand the entire lease agreement to avoid unexpected costs.

Make sure your lease works for you—not against you. Explore your options with expert guidance! 

Net Lease

In its purest form, a net lease requires the tenant to pay rent and all the costs of the property, including property taxes, insurance, and maintenance. Net leases are popular with commercial real estate investors who want a hassle-free investment.  

From the tenant’s perspective, a net lease may be beneficial if the base rent rate is low enough to offset the additional costs. Year-to-year property costs and maintenance costs may vary. Net leases usually favor the landlord and should be negotiated carefully to protect your interests.  

Single-Net Lease

In a single-net lease, the tenant pays a base rent plus one of the three categories of property expenses. In most cases, the tenant pays base rent plus the property taxes; however, a single-net lease might require the tenant to pay rent plus maintenance or insurance.  

Double-Net Lease

A double-net lease requires the tenant to pay base rent plus two of the property expenses. In most cases, the tenant pays rent, plus property taxes and insurance. 

Triple-Net Lease 

A triple net lease usually favors the landlord, requiring the tenant to pay rent plus taxes, insurance, and maintenance. Because of the extra costs, the base rent is lower than the rent needed for a gross lease.  

Absolute Triple-Net Lease

Also known as a bondable lease, a triple-net lease requires the tenant to assume all property-related risks. All expenses and repairs are the responsibility of the tenant. In the case of a casualty or condemnation, the tenant could be required to rebuild the property or continue rental payments, regardless of insurance payments or the condition of the property. Tenants should consult a lawyer and understand all terms completely before entering an absolute triple-net lease.

Which Lease Type is Best for Tenants?

Selecting the right lease type is crucial depending on your business needs and the specific circumstances you might be in. Here are some factors to consider that can help you decide which lease type is better: 

• Gross Lease: Best for businesses that need predictable costs without surprises. Ideal if you prefer simplicity and can negotiate terms that mitigate potential higher costs relative to net leases. 
• Percentage Lease: Suitable for retail businesses in high-traffic areas where sales are expected to perform well and exceed the threshold amount regularly. 
• Modified Gross Lease: Good for tenants who want a middle ground, sharing some expenses with the landlord, beneficial in markets with fluctuating costs. 
• Net Lease: Effective if you can secure a low base rent that compensates for the additional expenses you will handle. Suitable for tenants who prefer control over the property’s management and maintenance. 
• Single-Net Lease, Double-Net Lease, Triple-Net Lease: These are progressively more tenant-responsible leases and are best for tenants who can negotiate lower base rents and are capable of managing additional expenses effectively. Particularly beneficial in long-term occupancy scenarios where the tenant can spread out and manage costs better over time. 
• Absolute Triple-Net Lease: Ideal for tenants who want complete control and are prepared to take on all property-related risks, often in exchange for much lower base rents. 

When considering a lease, always factor in your business's financial stability, expected revenue, and the predictability of your operating expenses. Consulting with a commercial real estate expert can also provide valuable insights tailored to your specific situation. 

Which Lease Type is Best for Landlords?

Choosing the right lease type can significantly impact a landlord's financial returns and property management responsibilities. Here are some considerations for landlords when deciding which lease type might be most advantageous: 

• Gross Lease: Ideal for landlords who can charge a premium in rent to cover all property expenses, offering simplicity in management. Best suited for properties where operating costs are predictable and stable. 
• Percentage Lease: Highly beneficial for landlords with retail spaces in prime locations. This lease aligns the landlord’s revenue with the tenant’s sales performance, potentially offering higher returns during peak sales periods. 
• Modified Gross Lease: Suitable for landlords who want to share some of the financial risks with tenants. This type can be attractive in markets where variable costs are a concern but still provides a degree of predictability in income. 
• Net Lease: Attractive for landlords seeking minimal involvement in daily property management and a steady income stream. This lease passes most of the expense burden to the tenant, reducing the landlord's financial variability. 
• Single-Net Lease, Double-Net Lease, Triple-Net Lease: These increase the tenant's responsibility for expenses progressively and are best for landlords who prefer to minimize their operational roles. They provide a more stable net income as tenants cover most, if not all, variable and fixed costs. 
• Absolute Triple-Net Lease: The most advantageous for landlords who want to eliminate virtually all operational responsibilities and financial risks associated with property management. This lease ensures the landlord receives rent without being affected by any property-related expenses, even in cases of significant repairs or rebuilds. 

Landlords should consider their willingness to manage property-related responsibilities, the stability of property expenses, and how these factors align with their investment strategy. Consulting with a commercial real estate expert can also provide insights into current market trends and help tailor a lease strategy to maximize property profitability. 

Consult a Commercial Real Estate Manager

As a landlord, working with a skilled commercial real estate manager is key to maximizing your property's potential and ensuring your lease agreements are structured in your best interest. Here are several reasons and benefits of consulting with a real estate manager: 

• Expert Negotiation Skills: Real estate managers bring expert negotiation skills that can significantly increase your profitability. They are adept at structuring terms that optimize rent rates, escalation clauses, and lease durations to align with market conditions and your financial goals. 
• Market Insights: A seasoned real estate manager has deep insights into current market trends and tenant behaviors. This knowledge allows you to position your property competitively, ensuring you attract and retain high-quality tenants. 
• Risk Management: Real estate managers help identify and mitigate potential risks associated with lease agreements. They ensure that contracts include protective clauses and stipulations that safeguard your interests, particularly in complex leases such as triple-net or percentage leases. 
• Customized Strategies: Each property is unique, and a commercial real estate manager can develop customized leasing strategies that enhance the value of your specific property. Whether it’s deciding between offering a gross lease or a net lease, they provide guidance based on a thorough analysis of your property’s characteristics and potential. 
• Legal and Compliance Expertise: Keeping up with zoning laws, compliance issues, and legal changes can be challenging. Real estate managers ensure that all lease agreements comply with current laws and regulations, preventing future legal complications. 

Involving a commercial real estate expert not only enhances your ability to negotiate better terms but also ensures that your leases are structured to provide long-term stability and profitability. Millennium Properties’ Commercial Real Estate Team is knowledgeable about all aspects of commercial leasing. Contact us today to help you negotiate the best terms for your business.