7 Types of Commercial Leases You Need to Know
If you are looking for a commercial space to rent, you might be overwhelmed by the different types of leases available. Commercial leases are not one-size-fits-all, and each one has its own advantages and disadvantages for tenants and landlords. In this article, we will explain the 7 types of commercial leases you need to know, and how to choose the best one for your business.
Full-Service Lease/Gross Lease
A full-service lease, also known as a gross lease, is a type of lease where the landlord pays for all the operating expenses of the property, such as property taxes, insurance, maintenance, utilities, and janitorial services. The tenant only pays a fixed amount of rent every month, which includes all these costs. This type of lease is simple and convenient for tenants, as they do not have to worry about any additional or variable expenses. However, this also means that the rent is usually higher than other types of leases, and the landlord may increase it over time to cover rising costs.
Net Lease
A net lease is a type of lease where the tenant pays a lower base rent, but also pays for some or all of the operating expenses of the property. There are four variations of net leases:
– Single net lease: The tenant pays for property taxes in addition to rent.
– Double net lease: The tenant pays for property taxes and building insurance in addition to rent.
– Triple net lease: The tenant pays for property taxes, building insurance, and maintenance in addition to rent. This is the most common type of net lease.
– Absolute net lease: The tenant pays for all the operating expenses of the property, including capital expenditures, in addition to rent. This is the most extreme type of net lease.
Net leases are more favorable for landlords, as they transfer most or all of the risk and responsibility to the tenants. Tenants benefit from lower base rents, but they also have to deal with variable and unpredictable costs. Net leases are more common in single-tenant properties or properties with long-term leases.
Modified Gross Lease
A modified gross lease is a type of lease that combines elements of both full-service and net leases. The tenant pays a fixed amount of rent every month, which includes some of the operating expenses of the property. However, the tenant also pays for any increases in these expenses after a base year or an expense stop. For example, if the property taxes increase by 10% after the first year of the lease, the tenant will pay for that difference. The exact terms and conditions of a modified gross lease vary depending on the negotiation between the tenant and the landlord.
Percentage Lease
A percentage lease is a type of lease where the tenant pays a base rent plus a percentage of their gross sales or revenue. This type of lease is common in retail businesses, especially in shopping malls or centers. The percentage rate and the base rent are determined by factors such as location, foot traffic, market conditions, and industry standards. Percentage leases are beneficial for both tenants and landlords, as they align their interests and share the risk and reward of the business performance.
Ground Lease
A ground lease is a type of lease where the tenant rents only the land from the landlord, and builds their own building or structure on it. The tenant owns the improvements on the land, but not the land itself. The landlord retains ownership of the land and receives rent from the tenant. Ground leases are usually long-term leases that last for decades or even centuries. Ground leases are attractive for tenants who want to develop a property without buying land, and for landlords who want to retain ownership and control over their land.
Sandwich Lease
A sandwich lease is a type of lease where there are three parties involved: an original landlord, an original tenant (also known as a sublessor), and a subtenant. The original tenant rents a property from the original landlord under a master lease, and then subleases it to a subtenant under a sublease. The original tenant acts as a middleman between the original landlord and the subtenant, collecting rent from the subtenant and paying rent to the original landlord. A sandwich lease can be profitable for the original tenant if they can charge more rent to the subtenant than they pay to the original landlord. However, it also comes with risks and responsibilities, such as finding and managing subtenants, maintaining the property, and complying with both leases.
Lease Option
A lease option is a type of lease where the tenant has the option to purchase the property at a predetermined price within a specified period of time. The tenant pays an option fee upfront, which is usually non-refundable and credited towards the purchase price if they exercise their option. The tenant also pays rent every month, which may or may not be credited towards the purchase price as well. A lease option gives the tenant the opportunity to try out the property before buying it, and to lock in a favorable price in a rising market. However, it also obligates the tenant to follow the terms and conditions of the lease and the option agreement, and to forfeit the option fee if they do not buy the property.
How to Choose the Best Type of Commercial Lease for Your Business
Choosing the best type of commercial lease for your business depends on several factors, such as:
– Your budget and cash flow
– Your business goals and plans
– Your risk tolerance and preference
– The type and location of the property
– The market conditions and trends
– The negotiation power and flexibility of both parties
There is no one-size-fits-all answer to this question, as each type of lease has its own pros and cons. Therefore, it is important to do your research, consult with a professional, and compare different options before signing a lease agreement. A commercial lease is a long-term and legally binding contract that can have a significant impact on your business success, so make sure you understand what you are getting into and what you are getting out of it.
Types of Commercial Leases and Their Impact on the Industry
Commercial leases are contracts that allow businesses to rent spaces for various purposes, such as offices, retail stores, warehouses, or factories. There are different types of commercial leases that vary in terms of how the rent and operating expenses are divided between the landlord and the tenant. These types of leases can affect the demand and supply of commercial real estate in the market.
One of the most common types of commercial leases is the **full-service lease** or **gross lease**, where the tenant pays a fixed rent and the landlord covers all the operating expenses, such as property taxes, insurance, maintenance, utilities, and janitorial services. This type of lease is popular among tenants who want to avoid unpredictable costs and have a simple billing process. However, this type of lease also tends to have higher rental rates than other types of leases, as the landlord assumes more risk and responsibility for the property. Full-service leases are typically used for multi-tenant office buildings or medical offices.
Another type of commercial lease is the net lease, where the tenant pays a lower base rent and some or all of the operating expenses. There are four variations of net leases: single net lease, where the tenant pays property taxes; double net lease, where the tenant pays property taxes and insurance; triple net lease, where the tenant pays property taxes, insurance, and maintenance; and absolute net lease, where the tenant pays all the operating expenses, including capital expenditures. Net leases are favorable for landlords who want to transfer more costs and risks to the tenants. Net leases are usually used for single-tenant properties, such as freestanding retail stores or industrial buildings.
A third type of commercial lease is the modified gross lease, which is a hybrid between a full-service lease and a net lease. In a modified gross lease, the tenant pays a fixed rent and some of the operating expenses, while the landlord pays the rest. The terms of this type of lease can vary widely depending on the negotiation between the parties. Modified gross leases are often used for office buildings or flex spaces.
The type of commercial lease can affect the demand and supply of commercial real estate in several ways. For example, if operating expenses increase due to inflation or other factors, tenants who have full-service leases may be more inclined to renew their leases than tenants who have net leases, as they are protected from rising costs. On the other hand, landlords who have net leases may be more motivated to invest in improving their properties than landlords who have full-service leases, as they can pass on the benefits to their tenants and increase their rental income. Moreover, different types of leases may appeal to different types of businesses depending on their needs and preferences. For instance, businesses that require stable and predictable cash flows may prefer full-service leases, while businesses that want more control and flexibility over their spaces may prefer net leases.
References:
http://www.epra.com/media/EPRA_Real_estate_in_the_real_economy_infog1_1354797656783.pdf
https://en.wikipedia.org/wiki/Commercial_property#cite_ref-1
https://en.wikipedia.org/wiki/Commercial_property#cite_ref-2
(https://www.squarefoot.com/leasopedia/different-types-of-commercial-leases/)
(https://learn.g2.com/types-of-commercial-leases)
(https://butterflymx.com/blog/types-of-commercial-leases/)
https://www.squarefoot.com/leasopedia/different-types-of-commercial-leases/
https://learn.g2.com/types-of-commercial-leases
https://www.loopnet.com/learn/a-guide-to-the-3-most-common-types-of-commercial-leases/228906831/
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