In this article, we cover the basic types of commercial leases you should be aware of when handling commercial real estate. The difference types of commercial leases covered in this article are:
- Gross Leases (also known as Full Service Leases)
- Net Lease
- Single net leases (N lease)
- Double Net Lease (NN lease)
- Double Net Lease (NN lease)
- Triple Net Lease (NNN Lease)
- Absolute Triple Net Lease
- Modified Gross Lease
As a business in Iowa, there are three basic types of commercial real estate leases you will see. These leases have two rent calculation methods, gross and net. A gross lease is when the tenant pays one lump sum for rent, from which the landlord pays their expenses. A net lease has a smaller base rent cost and the tenant is then responsible for other expenses relating to the unit. Finally, there is a modified gross lease which takes aspects from both styles of the leases. The following overview will provide an overview of these leases to help Iowa businesses make the best decision on their leases.
Gross Leases (also known as Full Service Leases)
In a gross lease, your rent payment is all inclusive. The landlord will pay for most or all expenses associated with the property/unit you are renting. This includes taxes, insurance, and maintenance of the property/unit, and even utilities and janitorial services in most instances.
When negotiating a gross lease, it is important for the tenant to inquire about what is all included as part of the gross lease. For example, sometimes the janitorial services are limited or only include common areas of the property. There may be limits or caps on utilities to prevent tenants from overusing electricity, water, etc. Finally, there may be exceptions requiring the tenant to pay for their own property insurance and taxes.
The main benefit of this style of lease is that it is very easy and straight forward for the tenant. The tenant knows their projected expenses for the building they are leasing. Additionally, there won’t be many, if any, unforeseen expenses relating to the building. The landlord assumes responsibility for the property and the tenant can focus on their business.
Net Lease
In a net lease, the landlord will charge a lower amount of rent than in a gross lease as a base for the property, but will charge additional costs, which included expenses associated with operations, maintenance, or other expenses the landlord would otherwise pay. These expenses can include janitorial services, property management fees, sewage, water, trash collection, parking lots, fire suppression systems, real estate taxes or property insurance. There are a few types of net leases.
Single net leases (N lease)
For a single net lease, the tenant pays a base rental fee plus a portion of the property taxes equivalent to the portion of the total building space the tenant is leasing or renting. The tenant will pay utilities and janitorial services. The landlord will cover the rest of the building expenses.
Double Net Lease (NN lease)
For double net leases, the tenant is responsible for the base rent plus a proportional share of the property taxes and property insurance. The tenant will be responsible for their own janitorial and utility expenses but the landlord will cover the expenses for structural repairs and common area maintenance.
Triple Net Lease (NNN Lease)
Triple net leases are mainly used for large, free standing commercial buildings and retail spaces. On triple net leases, the tenant pays most or all of the property taxes, insurance, and common area maintenance on top of the base monthly rent. It is also common to have common area utilities and expenses added to the costs. Tenant also are obligated to pay the costs for their own occupancy including utilities, insurance, taxes, and janitorial services.
Landlords typically calculate the tenant’s portion of the expenses by dividing the amount of the building the tenant leases by the total size of the building. Therefore, if the tenant is leasing 3000 square feet of the 10,000 square foot building, they are liable for 30% of the expenses.
These triple net leases tend to be landlord friendly. Because of this, tenants should carefully review the terms of their triple net leases and fully understand the costs that are involved with them. Monthly expenses can fluctuate significantly making it difficult and tricky to accurately project property expenses for tenants. That being said, there are a few benefits to tenants for triple net leases. Because the tenant can control and negotiate some of the expenses with running the property that would otherwise be covered in a gross lease, you might be able to end up paying less per month than a gross lease. This is not always the case, and it is important to review and consider the additional expenses involved prior to signing a net lease.
Absolute Triple Net Lease
Absolute Triple Net Leases put the most responsibility on the tenant for the property. The tenant carries every risk that they would have as if they owned the property. This includes construction expenses, payment of rent if the building was condemned or destroyed by a natural disaster. Tenants carry the ultimate responsibility for the property.
Modified Gross Lease
The Modified Gross Lease is a compromise between gross and net leases. The modified gross lease is similar to a gross lease in that the rental payment by the tenant is one gross sum. However, the landlord and tenant can agree on certain fees, property taxes, insurance, or maintenance items to add or subtract. The landlord can offer some of these fees to be included in the gross sum. This offers flexibility and the ability for landlords and tenants to negotiate in a way that best fits both of their needs.
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