Key Types of Commercial Leases in Real Estate

A deep understanding of commercial leases is crucial for success for commercial agents. This knowledge is also vital to passing your upcoming real estate exam.

Let’s explore what these leases are and how they work.

What are Net Leases?

In a net lease, the tenant is responsible for a portion or all property expenses, including taxes, insurance, and maintenance, in addition to the base rent. Net leases come in several variations:

Single Net Lease: 

The tenant pays rent and property taxes.
Example: A boutique store rents a space, paying $2,200 monthly plus annual property taxes of $5,500.

Double Net Lease: 

The tenant pays rent, property taxes, and insurance.
Example: An office tenant pays $3,300 monthly, $6,700 in property taxes, and $2,200 in insurance annually.

Triple Net Lease (NNN): 

The tenant covers all operating expenses, making it a common net lease.
Example: A diner pays $4,200 monthly, plus property taxes, insurance, and maintenance costs totaling $13,000 annually.

Absolute Net Lease: 

The tenant assumes all property expenses, including major repairs.
Example: A major retail chain leases a building for $11,000 monthly and covers all expenses, including a $55,000 roof repair.

Net leases shift financial responsibility and risk to the tenant, benefiting landlords.

What are Percentage Leases?

A percentage lease involves the tenant paying a base rent plus a percentage of their gross sales, commonly used in retail spaces. This arrangement benefits both parties: tenants have lower base rents, and landlords receive a share of successful business revenues.

Example: A bookstore in a mall pays $2,100 monthly in base rent plus 7% of gross sales over $55,000. If the store earns $85,000 in a month, the tenant pays an additional $2,100 ($85,000 - $55,000 = $30,000 * 7%).

Percentage leases are prevalent in shopping centers, aligning landlord income with tenant success.

Variable Leases: Rent Adjusters

Variable leases adjust rent according to specific conditions. There are two main types:

• Index Lease: Rent is tied to an economic index, usually the Consumer Price Index (CPI), allowing rent to adjust with inflation or other market conditions.
  Example: An office lease starts at $5,600 monthly, adjusting annually based on the CPI. If the CPI increases by 2%, the new rent is $5,712 monthly.
• Graduated Lease: Rent increases at predetermined intervals, often annually, which is beneficial for growing businesses.
  Example: A tech startup signs a lease for $3,300 monthly, with a 3% annual increase. In the second year, the rent is $3,399 monthly.

Variable leases are useful for tenants anticipating growth and for landlords seeking predictable income increases.

What are Gross Leases?

In a gross lease, the tenant pays a fixed rent amount, while the landlord covers most or all property expenses, such as taxes, insurance, and maintenance. Gross leases have two subtypes:

• Full-Service Lease: The landlord covers all expenses, providing simplicity for the tenant.
  Example: A law firm leases office space for $7,500 monthly, with the landlord covering all utilities, taxes, and maintenance.
• Modified Gross Lease: Costs are shared, with specific expenses negotiated between the landlord and tenant.
  Example: A marketing agency pays $5,000 monthly in base rent and shares utility costs with the landlord, who covers taxes and insurance.

Gross leases offer simplicity and predictability for tenants, while landlords manage operational expenses.

Final Thoughts on Commercial Leases

By thoroughly understanding these lease types and their unique characteristics, real estate agents can better serve clients in the commercial real estate market, leading to greater client satisfaction and success in their careers.

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