The Basics of Commercial Lease Types
There are several commercial lease types, and understanding all the terminology involved in, like triple net investment, NNN investments, or a 1031 exchange investment can be overwhelming. Commercial lease types also tend to vary by location, so it?s always helpful to have a lease advisor or broker to discuss things with. To help you get your feet wet, though, here are some of the basics about commercial lease types:
- There are two ways of calculating leases: gross and net. In gross leases, the tenant is usually responsible to pay one lump sum that covers not only rental on the property, but also taxes, utilities, and all the various fees. The landlord pays for things like maintenance and janitorial service out of that sum. With a net leas, only the base rate gets paid and the tenant is responsible for all expenses, such as property tax, insurance, janitorial service, and more.
- The full service gross lease includes everything. This type of commercial leasing is really for tenants who don?t have time or interest in sorting out where to pay the water bill, whether the janitorial service is due a payment on the 10th or the 20th of this month, and haggling with garbage service during a strike. An advantage of this type of lease for the tenant is that costs are static throughout the year. For example, if air conditioning or heating increases energy costs during the summer or winter, this does not change the rent. The downside is, of course, that the ultimate yearly cost is almost always higher than if the tenant had paid for everything separately.
- The modified service gross lease tries to be the best of both worlds. This type of lease involves a lot of negotiations, as the tenant and landlord hammer out who will pay for what, and how much. If bargaining and negotiating don?t stress everyone out, though, it can be a way of compromising that leaves both parties satisfied.
- There are four different types of net leases, speaking generally. While the gross lease types are more common in buildings with multiple tenants, the net lease is usually used for single tenant structures. The tenant is responsible for certain operating costs, depending on the lease type. Net commercial lease types include the single net least, double net lease, and triple net lease. In the single, the tenant pays for rent and property taxes, while the landlord covers insurance and maintenance. Utilities and janitorial services may go either way. The double net lease is similar, but the tenant will also pay for property insurance.
Triple net properties, also referred to as NNN properties, are the most common and the favorite among landlords, as the tenant will be paying all maintenance fees, taxes, other fees, and insurance, as well as rent. An NNN lease is generally only made with a tenant who has excellent credit. This types of lease is popular with part-time investors.
There are many different commercial lease types, and sorting through all of them can be tricky, There are also issues of depreciation and credit to consider, and it?s important to remember that there?s no such thing as completely risk-free investment. Discussing the leasing possibilities with a net lease advisor is key to understanding all the issues and determining what is best for you.