Commercial Lease Types

What You Need to Know

NNN, modified gross, net.

All of these are types of commercial leases that you’ll encounter in your search for commercial real estate space.

Why the Various Leases

It’s a simplified way of determining how expenses – in addition to your base rent – will be handled during your time on the property. It is important to understand what your lease does — and usually more importantly doesn’t cover – when you explore renting a property for commercial use.

When I sold C.G. Boyce Real Estate Co. to a national brand, I had a modified gross lease with the building owner. The national brand chose to sublease from me rather than take over the master lease and I had a full-service lease with them. Hence, when the baseboard heating didn’t work the first time it was turned on for the season; I had the luxury of paying the electrician to fix it. Had I done a better job of negotiating either of the leases, I would have mitigated that risk.

Sometimes the risk is worth the reward. I have several clients that have risky situations but they were able to negotiate terms that the risk was worth taking on. We could go on more about risk, but that’s for another blog post on another day.

Types of Commercial Leases

There are essentially eight types of commercial leases offered by landlords. Among them include:

Double Net Lease. Another less common rental type, but the tenant is responsible for paying the base rent plus a pro-rated portion of property taxes and building insurance. Both additional costs would be broken down to a price per foot and then allocated based on the number of square-foot rented. Would be used in older buildings where the utilities and maintenance costs are not easily broken down to pass along to the tenants.
Full-Service Lease. Used to be common in office situations, but with the decline in office space is also falling out of favor. You rent the space from me, but if anything goes wrong from a light bulb burning out to a stopped-up toilet you call my team to handle all the repairs. If it is considered normal wear-and-tear then you are not charged for the repairs.As a tenant, this can be a perfect situation if you are entering a new market and have limited knowledge of contractors. However, you’ll pay more per month for the service
Modified Gross. Essentially, a single- or double-net lease with a little different terminology. The building owner and tenant split the expenses based upon the agreement. Very common in situations where there are easily passed along expenses and the businesses are similar. The key is similar because two professional offices are going to use similar utilities; compared to an office next door to a dog wash and splitting the water equally would not be fair.
Percentage Lease. This one is a favorite of mine. Because the landlord becomes more tied to the business’s success than just a rent collector. The rent is, usually, below market rate but the building owner gets a percentage of net profits from the business. Usually, this is done when there is a high-risk/reward opportunity with the company. A great opportunity for this would have been when we were marketing 7775 Dublin Road. Ownership and I had a vision of a coffee shop in the space, but it was 180 degrees from what had historically been in the space. So to entice a tenant we could have offered lower rent plus a percentage of the net profit.
Land Lease. One of the more unique on this list, land leases involve the tenant simply paying rent for the land and then being responsible for all costs associated with the structure, parking lot, etc. during the term of the lease. This is popular for a lot of franchises from fast food to Dollar Generals.
Single Net Lease. An agreement where the tenant pays one expense on top of the rent, usually it is property taxes. This is popular in a situation where the utilities are tied together for a building, and it would be very hard for individual tenants to break out. However, the landlord would take the property tax per foot times the rented square foot and assign that to the seller.
Triple Net (NNN). Triple-net leases, sometimes referred to as absolute net, are the most desired for landlords. In this model, the tenant will pay base rent plus be responsible for all building maintenance, taxes, and incidental costs. If more than one tenant, each tenant will pay a pro-rated amount of maintenance costs, and each unit is usually served by its mechanicals.

Which one is the best commercial lease for you?

That is entirely dependent on your situation as a tenant and often is dictated by the type of space that you are renting. Older multi-tenant buildings tend to be modified gross due to the difficulty of splitting all the costs up, but almost all new commercial spaces are designed to be Triple Net.

If you are considering renting commercial real estate in Central/North-Central Ohio then contact Parker Realty Associates’ Toby Boyce at 419-618-8629 or via email at [email protected] for more information.