Commercial real estate leases are complex documents, but they can be understood when you have some background about the terminology associated with them. The types of leases commonly used in commercial real estate is a good starting point, as understanding what each of them involves can help you determine which type will be the best fit for your business needs. The three types of leases are:
Also known as a full service lease, a gross lease includes all of the operating expenses for a property, such as the utilities, maintenance and property taxes. The upside of these leases is that you are only responsible for paying for one cost. Rent will also remain the same throughout the year, even if you have an unseasonably hot summer that means extra cooling costs or a bitterly cold winter that results in the heating system working over time. On the downside, the base rent will be much higher with this type of lease. Bear in mind landlords may try to add language to the lease that allows for increases in rent if certain events occur like a steep increase in property taxes or insurance premiums.
With a net lease, base rent is lower but costs are highly variable. There are three kinds of net leases that you need to be aware of:
- Single Net Lease. This type of lease requires you to pay a fixed rent and a portion of the property tax to your landlord and for utilities and services directly to providers. The landlord covers the costs of building expenses only.
- Double Net Lease. This type of lease is identical to a single net lease, except you are required to also pay a portion of the property taxes, leaving the landlord responsible only for the cost of maintaining common areas.
- Triple Net Lease. With this type of lease, you are expected to pay for a portion of all of the costs associated with double net leases plus a portion of the costs of maintaining common areas. This is one of the most common types of commercial real estate leases.
Net leases tend to favor landlords more than tenants; however, with this type of lease, you have the ability to demand to review your landlord's costs. If your landlord receives a lower tax assessment and property taxes and insurance rates drop, the savings are passed along to you and other tenants. Keep in mind with this type of lease, costs are unpredictable.
Modified Gross Lease
Also known as a modified net lease, you are assessed a fixed base rent and then a portion of operating expense costs. The way that these costs are shared and calculated will vary from lease to lease. These leases are an excellent compromise, as they can be favorable for both landlords and tenants. The main drawback to this type of lease is that negotiations will be lengthier and more complex. If you are hoping for a modified gross lease agreement, you should begin your search for office space early to ensure you have enough time to complete the process.
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