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A lease agreement essentially grants a tenant a specific set of rights related to a building, much aside from just being able to occupy space in that building.
The biggest determinant of those rights will usually be the type of lease being agreed upon by the tenant and landlord. For property owners and businesses, the benefits of different lease types can actually vary quite a bit, all depending on the business type, location, and intentions of the owner. Here, we look at the different commercial lease types and the typical terms that comes with an agreement.
A net lease is perhaps the most common form of commercial lease agreement. With a net lease, the tenant is responsible for a base rent payment, plus additional expenses associated with the property.
This is sort of like renting a single-family home: the owner pays the mortgage, but the tenant pays the owner rent and is then responsible for paying for their own utilities, arranging maintenance, and so on. With a single net structure, the tenant pays the rent and the property tax associated with the space they are renting. 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. With a single net lease, the landlord collects funds used to pay property taxes and then they can pay the taxes to the city directly.
With this type of agreement, the landlord maintains responsibility for utilities, maintenance and other related costs.
Double net leases are often used in multi-tenant buildings. This way, the 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. 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. A bondable net lease is a variation of the NNN lease, one that places every imaginable risk related to the property on the tenant. For instance, if the property were to catch fire due to an electrical issue, the tenant would be responsible for the rebuilding effort and would have to continue paying rent to the landlord in the meantime.
Bondable net leases cannot be terminated before the expiration date for any reason. Some landlords use bondable net leases to protect themselves from tenants seeking rent concessions in the event of major structural repairs required under a NNN 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. Consider the full service gross lease similar to an all-inclusive resort—pay one flat fee and the rest of the amenities are included.
Check it out and get in touch! And when it comes to commercial real estate , negotiating a leasing agreement between a landlord and tenant can get tricky. Commercial property leases are often long-term and costly. For many businesses, their physical location has a direct impact on their revenue and overall success. In a full service lease, sometimes referred to as a gross lease, the landlord covers all of the operating expenses related to the unit or space that is occupied by the tenant.
This includes insurance, property taxes, and maintenance costs. The tenant is only responsible for paying rent. If the operating expenses exceed this expense stop, the tenant will be responsible for paying them. Most landlords account for these operating costs by bumping up the price of rent.
However, this type of lease is inherently a bigger risk for the landlord since there could be unforeseen increases to their usual monthly expenses. Under a modified gross lease, the tenant pays their rent plus a portion of the operating expenses after the first year.
The terms of this type of lease will vary greatly from one landlord to the next. Most commercial leases will fall under this category, since it holds both the landlord and the tenant accountable for a portion of the operating expenses. As a reminder, operating expenses include insurance, property taxes, and maintenance costs. By requiring a net lease, the landlord protects their assets by putting some of the risk on the shoulders of the tenant. A percentage lease only applies to retail commercial properties.
To discover the answer to those important questions, you need to know exactly what kind of commercial lease you are signing. Signing a full service lease or gross lease means you are responsible for paying the base rent.
However, the landlord covers all the building expenses, including maintenance fees, insurance, and real estate taxes. When preparing to sign a full service lease, pay attention to how much the lease says you owe for common area maintenance. Types of net leases include triple, double, and single.
A triple net lease is essentially the opposite of a gross lease. Usually, triple net leases require reduced rental prices because the tenant has assumed responsibility for the operating expenses. A double net lease requires the tenant to pay for the rent and utilities, as well as the property taxes and building insurance. Landlords renting an office building to multiple tenants will likely divide the property tax and building insurance expenses fairly among the tenants.
A single net lease stipulates that tenants pay for rental and utilities as well as property taxes. The landlord would take care of building insurance and maintenance expenses. Be careful not to confuse a single net lease with a net lease. A net lease refers to a category of leases including single, double, and triple. A modified gross lease occupies the middle ground between a gross lease and a triple net lease. In general, a modified gross lease means that the tenant pays base rent, utilities, and a portion of operating costs.
The details vary from contract to contract. Their share of expenses would likely be based on the percentage of the building that they occupy. They are not, however, the same. Usually, triple net leases require tenants to pay for some or all building repair expenses, but in some cases the landlord will assist with those expenses.
Conversely, an absolute NNN lease delivers the landlord from all responsibility for the building in every case.
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