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Examining Five Different Types of Commercial Leases

Posted by Jane F. Bolin, Esq. | Nov 16, 2022 | 0 Comments

Learning what each lease type entails is essential before entering an agreement

Key takeaways

  • Commercial leases are different from residential leases
  • Your lease could have numerous terms and stipulations
  • Understanding what the various commercial lease types entail is important
  • An attorney will ensure you know what you're signing

Whether you're starting a business or moving to a new location, renting the ideal commercial property is vital for your company. This building could become a focal point for your organization, as customers, clients, and staff could spend significant time there. 

However, your commercial lease will be far different from a residential document, and understanding its terms and stipulations is essential for any business owner. Learning your rights and responsibilities before signing an agreement ensures you know what you're getting into ahead of time.

There are multiple types of commercial leases you should learn about early in the negotiation process. Here's a look at the various lease types you'll come across when renting a commercial property in Florida. 

Full-service lease

Also known as a gross lease, a full-service lease is commonly used by landlords of multi-tenant commercial properties such as office buildings. Under this agreement, the landlord charges the tenant a base rent amount and utility expenses while the landlord pays for maintenance, taxes, insurance, and other costs.

However, there could be stipulations in the agreement that cap the amount the landlord will cover in operational expenses after the base year. The base year is the first year of occupation and generally sets the base rent amount for the following years. Make sure you understand your gross lease conditions and what you could be on the hook for in the coming years.

Net lease

Tenants who sign a net lease will be responsible for a proportionate share of the commercial property's operating expenses. These expenses can include common area maintenance, insurance, and property taxes. There are three net lease types worth exploring to break this topic down further.

A single net lease, or N lease, calls for the tenant to pay rent, property taxes, and utilities. The landlord then pays the building insurance and maintenance fees.

Conversely, a double net, or NN, lease puts rent, utilities, property taxes, and building insurance premiums as the tenant's responsibility. In this situation, the landlord is only responsible for maintenance costs.

One of the most common types of commercial leases you'll come across is the triple net lease, or NNN. This is the opposite of a full-service lease, as the tenant pays for rent and utilities in addition to a proportionate share of maintenance, insurance, and property tax expenses. All the landlord pays is a base amount of building maintenance and repairs. This type of agreement can cause issues for tenants when maintenance fees are far higher than anticipated. 

Modified gross lease

A modified gross lease attempts to find common ground between a triple net lease and a full-service lease. This format calls for the tenant to pay a base rent amount and a portion of maintenance, tax, and insurance costs, while the landlord pays the rest of the operational costs. 

Typically, the tenant's share of the operating costs is based on the percentage of the building they occupy. So, if a business occupies 25% of a space, it's responsible for paying 25% of operational costs. However, the exact amounts are negotiable as part of your commercial lease agreement, especially if there are numerous tenants and common areas within a building. 

Absolute NNN lease

The terms absolute NNN lease and triple net lease are sometimes used interchangeably, but there is a significant difference. In a triple net lease, the landlord usually pays a portion of the building's maintenance and repair expenses, with the tenant covering everything else.

However, an absolute NNN lease makes every expenditure the building incurs during the agreement the tenant's responsibility. These costs can include significant repairs to the building's roof and structure, creating massive expenses for the tenant in some situations. 

Not worry, though, as absolute NNN leases are extremely rare and only apply to national or regional brands with excellent credit. Typically, these brands will sign these leases because they can secure a property in a desirable area for low rent and renovate it to their specifications without having to purchase the building. 

Percentage lease

A percentage lease differs from the rest because the company's success determines how much the tenant will pay. These agreements typically start with a base rent and include a stipulation allowing the landlord to collect a certain percentage of the business's revenue. 

This revenue amount is calculated on base sales, and the amount will likely have to pass a threshold before these terms come into effect. The landlord also pays all insurance, maintenance, and property tax fees, while hoping the business is successful enough in that location to earn additional income.

You'll usually see percentage lease agreements in retail spaces like outlet malls. Keep in mind that 7% is a typical amount, so you'll want to avoid landlords attempting to charge you significantly more than that to rent their building. 

Negotiating a lease that works for you 

Understanding precisely what you're responsible for paying as part of your commercial lease agreement is essential because it can limit the unexpected issues you encounter in the future. It also provides a clearer picture of your expenses so that you can develop a plan for success.

Of course, you can always negotiate the terms your commercial lease includes to confirm that the agreement works for you. Understanding your lease type and its stipulation is the first step in this scenario, as it ensures you know what you're talking about before hashing out a deal with your landlord.

PeytonBolin offers commercial real estate advice to business owners in Florida. We can provide a commercial lease review for your company, explaining the lease terms in full before you begin your negotiations. Contact PeytonBolin to learn more about our commercial real estate services.

About the Author

Jane F. Bolin, Esq.

Founding Member, Managing Partner


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