A Lesson in Leases: Types of Commercial Real Estate Leases

 

types of real estate leases

Part of a third-party project management firm’s job is to help navigate through the lease process. Of course, a real estate broker’s primary job is to work between the landlord and the tenant to negotiate the best possible lease agreement, but it never hurts to build in another layer of checks-and-balances to ensure that your best interests are upheld. When brought on early, a third party project manager can ensure that specific items relative to your space and your fit-out are addressed in your lease. For instance,  if new equipment is being purchased for your space that needs a certain amount of electrical capacity, your project manager can communicate that to you and your broker and ensure that the building provides enough electrical capacity, as per your lease agreement. Different types of commercial real estate leases all have slight nuances and differences between them. Below is an overview of each.

Gross Lease (AKA Full Service Lease)
The benefit of a gross lease is that it is easiest for the tenant. In this type of lease, the tenant pays a monthly rent fee that includes rent, taxes, utilities, maintenance fees, security fees, janitorial fees, etc. The landlord builds these fees into the rent and then pays these fees on behalf of the tenant. Typically, a rent escalation schedule will be included in the lease that spells out the annual rent increase for the length of the lease. There is often language the specifics that excess utility consumption will be billed back to the tenant.

Net Lease
There are several types of net leases: single, double and triple. The basic premise is that the landlord charges a lower base rent in addition to fees associated with operations and building maintenance; these fees are commonly referred to as common area maintenance (CAM) or operating expenses (OE). These fees include real estate taxes, property insurance, janitorial services, property management fees, water, trash collection, landscaping, etc.

In a Single Net Lease (N Lease), the tenant pays base rent plus it’s pro-rata share of the building’s property tax and the landlord covers all other expenses. The tenant also pays utilities and janitorial services.

In a Double Net Lease (NN Lease), the tenant pays base rent plus a pro-rata share of property taxes and insurance. The landlord covers common area maintenance while the tenant is responsible for their own janitorial and utility expenses.

A Triple Net Lease (NNN Lease) is the most common type of lease in commercial buildings. In a NNN lease, the rent does not include operating expenses. Operating expenses include utilities, maintenance, property taxes, insurance and property management. The tenant is billed for these expenses each month, in addition to rent.

Percentage Rent
Percentage rent is most commonly used in retail spaces. This means that the tenant pays a base rent and a percentage of the tenant’s profits each month.

For more information on the different types of commercial real estate leases Watchdog can point you in the direction of a well-qualified commercial real estate broker.

Related: Five Common Real Estate Terms Explained

Katie Craven
Katie Craven is Marketing, Communication and Brand Manager at Watchdog Real Estate Project Managers, a real-estate consulting firm that provides owner’s representation and project management services. More about Watchdog Real Estate Project Managers as well as additional blog posts can be found here.
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