What Are the Different Types of Commercial Leases?
Your company is growing and you are hiring a lot of new employees. This is great news! You are ready to expand your office space to accommodate all of the new hires and your office equipment. However, when you start to look at the office space available in your area, you are inundated with all of the different types of commercial leases available. What are all of these leases? What do the different types encompass? What would be the best type of lease for you and your company? Don’t get overwhelmed. A little reading will help you understand the various commercial leases you can choose from and explain which one might be the best for your needs.
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What Are the Different Types of Commercial Leases?
Commercial leases come in many different varieties, so potential renters need to make sure they understand what type of lease they are being offered before they agree to lease a space. Some leases include janitorial services and utilities in the rent, some do not. Others have tenants pay a portion of the property taxes and insurance. The most common types of commercial leases in Nevada include the following:
- Full Service/Gross Lease
- Modified Gross Lease
- Triple Net/NNN Lease
- Percentage Lease
Others that are less commonly used are:
- Double Net Lease
- Net Lease
- Absolute Lease
What Is a Full Service Lease?
In a Full Service, or Gross Lease, the rent is all-inclusive. All of the building expenses are covered by the landlord and the tenant is only responsible for the rent of the space. The landlord covers maintenance fees, real estate taxes and insurance. Items like utilities and janitorial services are included in the rental fee.
Because of all of these items being included, the rent in Full Service Leases tends to be higher than other leases. Also, keep in mind that excess utility use can sometimes be charged to the tenant in a Full Service Lease, so if your company uses a lot of electricity, you need to make sure you know if you will have extra fees charged each month.
What Is a Modified Gross Lease?
With a Modified Gross Lease, the tenant pays a base rent plus a pro rata share of the Common Area Maintenance (CAM) fees. The CAM charges are prorated are adjusted typically annually based upon the actual expense of the prior year and any known increase, such as property taxes, for the current year. CAM fees are costs associated with taking care of the common areas of a building and complex, like the parking lots, sidewalks, elevators, roofs, etc. There are numerous methods used to determine the cost included.
Tenants need to review the budget at the time of negotiating a lease carefully to ensure they are aware of the potential cost increases that may be allocated to them in the future. The amount you pay for these fees is typically proportional to the amount of the building you are renting. The bigger the space you rent, the more you have to pay. In a Modified Gross Lease, the landlord takes care of paying the taxes and insurance for the property.
What Is a Triple Net (NNN) Lease?
A Triple Net Lease requires the tenant to pay their base rent as well as part or all of the building’s expenses. These expenses include property taxes, insurance. building and complex maintenance & repairs, many include large capital improvements such as roofs and CAM fees. These are the three “Nets” of the Triple Net.
The Triple Net Lease is considered a more desirable lease for landlords. The tenant gets a separate bill for these items; it is not rolled into their rent payment. With this type of lease, you do not have to pay for the property or the construction of the building, but you are in charge of the upkeep of your space once you move into it.
How Does a Modified Gross Lease Differ from a Triple Net Lease?
A Modified Gross Lease is primarily based upon a budget for the following year as prepared by the landlord in advance. The tenant than has an expectation of what their expenses will be for the year. This leases typically adjust annually. The have a prorated amount rolled into their monthly rent. This type of lease is popular in buildings where there are multiple tenants, especially office buildings and retail centers.
A Triple Net Lease requires the tenant to pay for all operating costs, building & complex repairs, and maintenance, in addition to their monthly rent. All expenses associated with the building and complex are paid by the tenant, with the only exception being the cost to lease. This type of lease is popular in single tenant buildings, like free-standing commercial spaces. In Southern Nevada, most industrial space buildings, whether multi-tenant or not, will be Triple Net Lease.
What Is the Most Common Type of Lease?
The most common type of commercial lease is a Triple Net Lease. Tenants can manage their utility and janitorial costs with this type of lease. In a single building they are also usually in charge of the landscaping and upkeep, so they can be in control of the property’s appearance. In addition, the monthly rent for a NNN lease tends to be lower than a standard lease. Since the landlord doesn’t have to worry about the operating costs of the space, and these leases are usually signed for long initial periods, they can offer a lower rent.
Which Lease Type Is Right for You?
After reading about the different types of commercial leases available, how will you know which one is the right one for you and your business? Look at the options this way:
- If you just want to rent an office space and not worry about extra charges like utilities, a Full Service Lease may be the best bet for you.
- If you want to be in a building with multiple tenants and pay your share of the communal costs (CAM fees), proportionate to the size of your office, it might be better to go with a Modified Gross Lease. Have an annual budget you can count on.
- However, if you want the building all to yourself, and you feel confident in covering the operating expenses of the space, you will want a Triple Net Lease.
The most important thing to remember, no matter which type of lease you choose, is to read your lease carefully. Make sure you understand which of the expenses you are responsible for and what you are expected to pay each month. After reading and understanding the different options regarding commercial leases, you should be in a good position to pick the one that is right for you.