There are may different types of commercial real estate leases a business owner may enter into with a landlord. The responsibility and risk of the landlord and tenant differ with each, yet there is never assurance that one type of lease is economically more beneficial for a landlord or tenant than another type of lease. By understanding the different types of leases and the responsibility and risk associated with each type, we hope our clients are better situated to negotiate economic factors.
What is a Gross Lease?
In a gross lease, the landlord agrees to be responsible for all expenses which are normally associated with ownership of the leased premises, such as maintenance (including utilities and repairs), insurance, and taxes. A tenant with a gross lease is only responsible for paying the monthly lump sum base rent, which usually includes the building operating costs. The landlord is at risk that the operating costs are more than the landlord anticipated (and included in the monthly lump sum base rent). The tenant is assured that during the term of the lease, only the specified monthly lump sum base rent will be due.
What is a Modified Gross Lease?
In a modified gross lease, the tenant is responsible for paying the monthly lump sum base rent and the landlord is responsible for operating the building and all other costs associated with the premises. However, the modified gross lease usually passes any increases in operating costs to the tenant by way of a pass through provision such as an operating expense escalation clause. As in the gross lease, the landlord is still at risk that the operating costs are more than anticipated, despite the escalation clause and the tenant is assured that during the term of the lease, only the specified monthly sum base rent will be due.
What is a Net. . .Net Net. . .Net Net Net Lease?
In a net lease, the tenant has primary control of the premises and agrees to be responsible for some or all of the operating expenses of the premises, such as utilities, repairs, insurance, or taxes. There are Net (N) Leases, Double Net (NN) Leases, and Triple Net (NNN) Leases. Each "N" represents one of the three major expenses: real estate taxes, insurance and Common Area Maintenance (CAM).
In order to calculate the tenant's share of operating expenses, the landlord creates an estimated annual expense budget for the building. The estimated annual expenses are divided by the retable square footage of the building to determine the tenant's share of operating expenses which is then paid over the 12-month budget period. At the end of each year, the landlord reconciles the actual accrued expenses with what has been paid in during the year by the tenants in the building. Overpayments or shortfalls are reconciled with each tenant and a new annual budget for these expenses is created for the following 12 months.
Net Lease/Single Net Lease (N). In a single net lease, the tenant is responsible for a monthly lump sum base rent as well as the property taxes. The landlord is responsible for all other operating expenses of the premises.
Double Net Lease (NN). In a double net lease, the tenant is responsible for a monthly lump sum base rent as well as the property taxes and the property insurance. The landlord is responsible for all other operating expenses of the premises.
Triple Net Lease (NNN). In a triple net lease, the tenant is responsible for a monthly lump sum base rent, property taxes, property insurance, and operating expenses. If the premises are located in a building with other rentable area, the tenant is also responsible for its share of common operating expenses and common area utilities. Tenants are further responsible for all costs associated with their own occupancy including personal property taxes, janitorial services and all utility costs. In general, the landlord is responsible only for the structural integrity of the building.
What is a Shopping Center Lease?
In a shopping center lease, the tenant typically pays a monthly lump sum base rate, property taxes, insurance, operating expenses, and a certain percentage of tenant’s gross sales. A shopping mall lease will often include terms about signage, hours of operations, common areas and deliveries. The landlord may also have the right to relocate the tenant within the shopping center.
What is a Land or Ground Lease?
In a land or ground lease, the tenant leases the grounds and builds on the property. The tenant pays the landlord a monthly lump sum base rent, and is then responsible for all costs associated with the building. Typically, with a land or ground lease, all improvements on the property, including any building or buildings revert back to the landowner at the end of the lease period.
What is a Percentage of Sales Lease?
In a percentage of Sales Lease, some or all of the monthly rent is based on the gross sales of the business. The landlord receives a percent of the gross sales of the business, but the tenant may or may not pay a monthly lump sum base rent or other charges.
There are many complex aspects to commercial leasing. If you would like assistance with any real estate matters, please contact us at 970.612.1208 or at info@patterson-tabert.com.
NOTICE: This article represents copyrighted material and may only be reproduced in whole for personal or classroom use. It may not be edited, altered, or otherwise modified, except with the express permission of Patterson Tabert Law Offices. This article discusses general legal issues of interest and is not designed to give any specific legal advice pertaining to any specific circumstances. It is important that professional legal advice be obtained before acting upon any of the information contained in this article.