Sunday, June 23rd, 2019 June23rd2019

Sell for More Trivia: Can you define each type of commercial lease?

Published on June 23rd, 2019

Sell for More Trivia is a weekly blog series that playfully presents a trivia question about commercial real estate.

 

Apartment leases are much different than commercial leases.  Commercial leases are more nuanced.  A commercial lease essentially grants the tenant specific rights to the property. The most obvious right is the right to occupy the property.

Commercial leases almost always take the form of a written agreement, and are usually quite complex. It’s not uncommon for each party to seek the guidance of an attorney before signing a commercial lease.

Here are the major types:

Single Net Lease

  • Often referred to as an “N” lease, is the simplest form of net lease.
  • The tenant pays the rent and the property tax associated with the space they’re renting.
  • Not very common.
  • One of the only reasons a landlord would use a single net lease, instead of a gross lease, is to ensure property taxes are paid on time.
  • The landlord collects funds used to pay property taxes and then they can pay the taxes to the city directly.

Double Net Lease

  • A “NN” lease makes the renter responsible for the base rent, property taxes, and the cost of building insurance.
  • The landlord maintains responsibility for utilities, maintenance and other related costs.
  • Often used in multi-tenant buildings.
  • Landlord incurs the costs of structural issues on behalf of all tenants.
  • The landlord will generally prorate property taxes and building insurance to each tenant based upon their total leased square footage.

Triple Net Lease

  • Arguably the favorite among commercial landlords
  • A “NNN” lease makes the tenant responsible for the majority of costs, including the base rent, property taxes, insurance, utilities and maintenance.
  • This even includes standard property repairs associated with the commercial space in question.
  • For example, if the roof leaks, the tenant in a NNN lease will have to pay for it to be repaired.
  • Given the costs born by the tenant in a NNN lease, the base rent payment is typically lower on a per square foot basis.
  • NNN leased properties are often owned by investors who prefer to take a more hands-off approach to management.

Full Service Gross Lease

  • A full service gross lease is one in which the tenant pays a fixed rent each month.
  • The landlord is responsible for covering all other costs, including those related to operations and maintenance.
  • Costs typically include insurance, utilities, management, and state and local taxes.
  • Consider the full service gross lease similar to an all-inclusive resort—pay one flat fee and the rest of the amenities are included.

Modified Gross Lease

  • A modified gross lease is similar to a full service gross lease with one major exception—this lease type makes the tenant responsible for any incremental increase in the building owner’s operational costs beyond the costs calculated in the base year of the lease.
  • So, if the city increases property taxes, the tenant may be expected to pay a portion of the increase.

Percentage Lease

  • Most often used by restaurants and retailers.
  • With a percentage lease, the tenant is expected to pay a base rent – or a minimum amount of rent – in addition to a percentage of the business’s gross income.
  • The rent payment is calculated as: Base Rent + % of Gross Profits = Rent Payment

 


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About Beau Beach, CCIM

Beau is a tenacious Commercial Real Estate Broker, author and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.

Beau leads Beachwood which is a commercial real estate broker for sellers in the Nashville, Milwaukee, South Florida and Chicago markets.

He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.

Beau can be reached at 800-721-3287, click to schedule a call or Beau@ProwessIRES.com