From gross leases to net leases, these are 5 popular types of commercial real estate leases that every buyer, seller, investor and broker should know.

Whether you’re a buyer, seller, investor or broker, it’s essential that you understand the basics of commercial real estate leases. Before you negotiate and sign your next commercial lease, make sure you understand the answers to some important questions.

For example, does the landlord or tenant pay property taxes and insurance? Who pays utilities and maintenance expenses? The answers to these questions depend on the type of commercial real estate lease that you are signing. Each type of commercial real estate lease has different requirements for landlords and tenants. When you understand the basics of commercial real estate leases, you’ll be better informed about your expected financial and legal obligations and responsibilities.  

In the article, we will cover five commercial real estate leases that you need to know, including:

• Gross lease
• Net lease
• Absolute triple net lease
• Modified gross lease
• Percentage lease

Gross lease

What is a gross lease? A gross lease, which is also known as a full service lease, is a type of commercial real estate lease in which the tenant is responsible for paying the base rent. However, the landlord is responsible for real estate taxes, insurance, maintenance, repairs, utilities and other property expenses. 

With a gross lease, the tenant pays rent to the landlord, and the landlord uses the rent payment to pay expenses for the property. Tenants may prefer a gross lease because rent is fixed, and they don’t have to become involved in day-to-day property management. Tenants may also like the downside protection of having a fixed rent cost even if expenses are variable. 

For a tenant, the disadvantage of a gross lease is the relatively high rent. Why? A landlord may set a higher rent for the tenant to offset at least some of the landlord’s expenses. If you’re a tenant, it’s important to understand the terms and conditions of your gross lease. For example, with some full-service leases, tenants may be required to pay a percentage of operating expenses. 

Net lease

A net lease is another type of commercial real estate lease. Unlike a gross lease, a net lease typically requires a tenant to pay a portion of the property’s operating expenses, which may include utilities, property taxes, insurance and common area maintenance (CAM) fees. There are three main types of net leases:

• Triple net lease;
• Double net lease; and
• Single net lease

Triple net lease

A triple net lease is a commercial real estate lease in which the tenant agrees to pay rent and utilities, plus all three major operating expense categories: insurance, property taxes and maintenance. A triple net lease, therefore, is net of operating expenses and the opposite of a gross lease. In contrast to a gross lease, a triple net lease may have a relatively lower rent because the tenant pays for operating expenses.

Double net lease

A double net lease requires a tenant to pay rent and utilities, plus two major operating expense categories: insurance and property taxes. In contrast to a triple net lease, the landlord pays for a property’s maintenance expenses. Like a triple net lease, the rent in a double net lease is relatively lower because the tenant is financially responsible for operating expenses in addition to the base rent. 

Single net lease

With a single net lease, a tenant pays rent and utilities, plus one major operating expense category, which is typically property taxes. The landlord pays insurance and maintenance.   

Importantly, while there are standard definitions of triple net lease, double net lease and single net lease, terms and conditions vary by lease. Therefore, it’s essential to read and review each individual lease to understand the respective financial responsibilities between the landlord and tenant.

Absolute triple net lease

An absolute triple net lease is a commercial real estate lease that requires the tenant to pay for all operating expenses for the property, including maintenance and repairs. For example, these expenses could include maintenance or structural repairs, such as repairs to the roof. With an absolute triple net lease, the landlord is not financially responsible for the property’s costs. In contrast, a triple net lease requires the tenant to pay for some or all the building’s expenses, with the landlord potentially covering some structural repairs. 

When should landlords and tenants use an absolute triple net lease?An absolute triple net lease is typically used for tenants with a national or regional footprint, excellent credit and the need for a long-term lease. Like a triple net lease, the base rent for an absolute triple net lease is lower than other types of leases.

Modified gross lease

A modified gross lease is a type of commercial real estate lease in which the tenant pays base rent, utilities and some operating expenses. The landlord pays the remaining operating expenses. Therefore, a modified gross lease is a hybrid model between a gross lease and triple net lease.

Percentage lease

A percentage lease is a popular commercial real estate lease for retail businesses. With a percentage lease, a tenant pays a base rent plus a percentage of gross sales above an agreed-upon natural or artificial breakpoint. There are multiple ways to structure a percentage lease. The total amount the tenant pays can vary based on the gross sales a tenant generates each month. At a minimum, the tenant pays the base rent each month. If the tenant achieves gross sales above the agreed-upon breakpoint, the tenant pays a base rent, plus a portion of those gross sales (typically a percentage) above the breakpoint. If the tenant doesn’t generate gross sales above the breakpoint, the tenant pays only the base rent. Since the tenant is paying base rent and a percentage of sales, the landlord pays some or all the property taxes, insurance and maintenance expenses.

Final Takeaways

When negotiating your next lease, it’s essential to choose the right lease for your business, goals and growth profile. In addition to basic terms like rent and lease term, make sure you understand who pays for ancillary charges such as maintenance, insurance, taxes, repairs and any other financial obligations. By negotiating these provisions upfront, and choosing the best lease for your business, you can minimize legal costs and related disagreements in the future.