A Review of Common Types of Commercial Leases and Lease Terms
A commercial lease is often a lengthy and murky document, drafted by a landlord (or its attorney), and negotiated by realtors, brokers, agents, or attorneys. The future tenant often cares only about the bottom line or total cost of the lease, but the different kinds of commercial leases have important differences for the tenant.
Common commercial lease categories include:
- Gross Leases
- Net Leases, including Double Net and Triple Net Leases
- Percentage Leases
A Gross Lease is a type of commercial lease that generally favors the tenant (lessee) because the landlord (lessor) pays all “usual costs” that are associated with owning and maintaining the rented space. In a gross lease the landlord may cover costs including utilities, water and sewer, repairs, insurance, and/or taxes. Gross leases usually favor the lessee.
Fully Serviced Leases
A “Fully Serviced Lease” refers to a lease in which the monthly rent includes the cost of certain types of services, which may include janitorial services, trash collection, utilities, water and sewer charges, property taxes, etc. Instead of the tenant opening their own service or utility accounts and directly paying for these costs, the landlord pays for the expenses, but includes an amount in the monthly rent to help off-set these service and utility costs. This allows the landlord to allocate the service and utility costs to the tenants.
Usually, the additional amount to be paid for service and utility expenses is fixed by the lease. However, some Fully Serviced Leases (sometimes also called “full service leases”) can allow the landlord to call for a “Gross Up.” In a Gross Up, the expenses are calculated for the tenants’ pro-rated share of the service and utility costs. The landlord divides the total expenses by the number of gross square feet in a building and charges each tenant an amount based on the percent of square feet the tenant occupies. A Gross Up is often used when a commercial building is less than 90-95% occupied. In that case, a Fully Serviced Lease may operate more closely to a Net Lease than a Gross Lease.
A Net Lease is a type of commercial real estate lease in which the lessee (tenant) pays for their space, as well as for part or all of certain “Usual Costs” (expenses associated with operating, maintenance and use of the property) that the landlord pays. Expenses incorporated into net leases may include common area maintenance (CAM), taxes, utilities, janitorial services, property insurance, property management fees, sewer access charges (SAC), water access charges (WAC), and trash collection fees.
Usual Costs that are added into net leases are generally broken down into three categories of expenses: maintenance, insurance, and taxes. A Double Net Lease usually requires the lessee to pay all taxes and insurance; and a Triple Net Lease usually requires the lessee to pay all maintenance, insurance, and taxes.
A common method of allocating Usual Costs amongst tenants in a commercial building is to compute a Load Factor for the space to be rented. The landlord factors the Usable Square Feet rented by the tenant, plus a percentage of common area square feet, to determine the Rentable Square Feet for the lease. Common areas can include restrooms, lobby, elevators, stairwells, and common hallways. The addition of a percent of the common area expenses to monthly rent is known is the Load Factor.
Net leases almost always favor the lessor (landlord). Prospective lessees should always try to negotiate caps on expenses included in net leases, or maximum amounts a landlord can increase fees each year.
Double Net Leases and Triple Net Leases
A Double Net Lease is a type of net lease in which the lessee (tenant) pays all or part of taxes and insurance associated with use of the property, in addition to the monthly rent for use of the actual space.
A Triple Net Lease (also known as Net Net Net Lease or NNN Lease) is a type of net lease in which the tenant pays all or part of the taxes, insurance, and maintenance associated with use of the property, in addition to the tenant’s regular monthly rent. Usually, a Triple Net Lease will spell out a percentage of CAM for which the tenant will be responsible, and will call for an annual reconciliation of actual costs to estimated costs (sometimes referred to as a “True Up”).
Triple Net Leases almost always favor the landlord and should be carefully negotiated to limit how much the landlord can increase fees each year.
A Percentage Lease typically requires a tenant to pay “Base Rent” and then, on top of that amount, the tenant also pays a percentage based on monthly sales volumes. Percentage leases are commonly executed in retail mall outlets and other commercial retail leases.
Percentage leases should not take a percentage of all sales made, but should include a percentage paid to the landlord (lessor) only when a tenant has made a certain amount in any given month. For example, a percentage lease might require a tenant to pay 5% of all sales that exceed more than $25,000 in any given month.
Commercial leases are often filled with traps for unwary or unsuspecting tenants. Any commercial lease should be carefully reviewed and negotiated, so all parties are certain of the terms of the lease. If you have any questions regarding commercial leases, contact an experienced real estate attorney, such Bart Gernander or one of the other attorneys of Burns & Hansen, P.A..