Commercial Lease Types Explained

If you run a business and want to rent office, retail, storage or industrial space, understanding the different types of commercial leases is essential. Commercial lease types vary widely in structure, cost responsibilities, and flexibility. Finding the right type for your business is the first step to landing in the ideal space.

The information on this page takes you through the different types of commercial real estate leases and the advantages and disadvantages of each. With this knowledge in hand, you can narrow down your options and find the lease type that is optimal for your business’s current needs and its long-term growth and success.

Commercial Lease Terminology

Before discussing types of commercial leases, it is a good idea to familiarize yourself with common terms that apply to them:

• Base Rent: The fixed minimum rent a tenant pays, not including taxes, insurance, or other costs.
• CAM (Common Area Maintenance): Shared costs for maintaining common areas like hallways, restrooms, elevators, and landscaping.
• Escalation Clause: A lease clause that allows the landlord to increase rent periodically, often tied to inflation or increases in operating costs.
• Build-Out (Tenant Improvements): Custom changes made to the rental space to suit a tenant’s needs. These are often negotiated as part of the lease.
• Option to Renew: A clause giving the tenant the right to extend the lease beyond its initial term, often at a predetermined rate.
• Usable Square Footage: The actual space the tenant occupies.
• Rentable Square Footage: Includes usable space plus a share of common areas.
• Holdover Clause: Details what will happen if a tenant stays in the space after the lease ends.

Gross Lease (Full-Service Lease)

The gross lease is one of the most common types of commercial leases. They are often used for units in multi-tenant office buildings. With a gross lease, the tenant pays one flat fee that covers the base rent and utilities. The landlord then typically handles operating costs like maintenance fees, insurance, and real estate taxes. The tenant receives one bill, making budgeting and bill payment straightforward.

Gross leases are convenient for tenants who do not want to get involved in the day-to-day operations of the facility. However, rents tend to be higher because the landlord handles most of the building responsibilities. Tenants also have little to no control over building expenses.

Net Lease

Several types of commercial leases fall into the general category of net leases. These leases shift more financial responsibility from the landlord to the tenant. There are three main subtypes:

• Single Net Lease (N Lease): The tenant pays base rent and property taxes. The landlord covers the insurance and maintenance.
• Double Net Lease (NN Lease): The tenant pays base rent, property taxes, and insurance. The landlord is responsible for maintenance.
• Triple Net Lease (NNN Lease): The tenant pays base rent plus all three of the major operating expenses, those being property taxes, insurance, and maintenance and repairs.

Net leases are the most common lease type for freestanding retail buildings and industrial spaces. Base Rents tend to be lower for these types of commercial real estate leases, and operating costs are more transparent. However, compared to gross leases, net leases may have higher monthly costs and those costs are less predictable. Tenants also have greater responsibility for property maintenance and repairs.

Modified Gross Lease

A modified gross lease is a cross between a gross lease and a net lease. The tenant and landlord split operating expenses according to the terms negotiated in the lease.

Modified gross leases offer flexibility to negotiate terms and more control over some of the costs. Arrangements can vary widely; therefore, a careful review of the terms is essential for these types of commercial leases.

Percentage Lease

In a percentage lease, the tenant pays a base rent plus a percentage of their business’s gross sales. These types of commercial leases are most often used for retail spaces, especially in shopping malls and outlet centers.

Percentage leases tend to have a lower base rent. Since the tenant pays less when revenues are lower, expenses can be more manageable during down cycles. However, they have more complex accounting requirements. Those may require an additional software investment up front. Tenants also have less privacy around how their businesses operate since landlords will have access to revenue information.

Absolute Net Lease (Bond Lease)

With an absolute net lease (also called a bond lease), the tenant is responsible for all expenses and all aspects of property maintenance. That includes structural repairs, roof and HVAC replacement, and property damage due to uncontrollable factors such as natural disasters.

These types of commercial real estate leases are suitable for long-term, single-tenant properties. This is true especially for national chain stores or major franchises. They give the tenant long-term control over the property and its expenses, but they present a much higher risk for the tenant.

Choosing Between Commercial Lease Types

Lease structure can have a huge impact on a business’s cash flow, financial planning, and even scalability. While a triple net lease might offer a lower base rent, it could cost more over time if maintenance or property taxes go up substantially. In contrast, a gross lease is much more predictable but limits the tenant’s control over expenses.

Doing your research and reading the fine print is essential to signing a lease that gives you the control and flexibility you need without tying you up financially. When in doubt, work with a knowledgeable REMAX commercial real estate professional who has the expertise to help you find the best fit for your business.