Understanding the Many Types of Commercial Leases

Other than payroll costs, there is generally no other larger ongoing cost that a business pays than its commercial lease obligation. Moreover, often the term for a typical commercial lease will extend far into the life of any business. Finally, there are a multitude of ways in which a poorly drafted lease can cause a business to incur significant unforeseen costs. Accordingly, it is critical that every business devotes the necessary resources, including the use of an experienced lawyer, to negotiate a fair lease.

Lavelle Law will be writing a series of articles commenting on the issues faced by a Tenant in commercial leases. 

Here, we explore some of the most common commercial lease types and how they impact both parties.

1. Gross Lease

A gross lease is a simple lease and most understood. In a gross lease, the tenant pays a fixed base rent, usually monthly. Such amount is not impacted by the costs of the landlord to maintain the common areas of the property. The landlord assumes responsibility for managing and paying the various operating and property expenses (such as insurance, real estate taxes, landscaping, and janitorial) using the rent received from the tenant. Because of this, the base rent in a gross lease is typically higher than in other lease types, but tenants benefit from predictable costs and simplified budgeting. Gross leases are commonly found in office buildings and multi-tenant properties where landlords maintain overall control of property expenses.

2. Net Lease

A net lease is a highly flexible commercial lease in which the tenant pays a lower base rent but also assumes responsibility for specific property expenses such as taxes, insurance, and maintenance. There are five main types of net leases:

• Single Net Lease: Tenants pay a base rent plus a portion of the property taxes, while the landlord covers building expenses. The tenant is also responsible for utilities and other direct service costs.
• Double Net Lease: Similar to a single net lease, but the tenant also pays a share of property insurance in addition to property taxes. The landlord remains responsible for maintaining common areas.
• Triple Net Lease (NNN Lease): Tenants pay for property taxes, insurance, and common area maintenance (CAM) in addition to the base rent. This structure shifts more financial responsibility to tenants but allows them to review the landlord’s operating expenses, potentially leading to cost savings. This is the most common form of a net lease.
• Absolute Triple Net Lease: This lease structure transfers full financial responsibility to the tenant, including all repairs and rebuilding costs in the event of damage. It is rare and often seen as an alternative to property ownership.
• Modified Triple Net Lease: This is similar to a triple net lease. However, the primary difference is that the tenant is only responsible for the operating costs if they exceed the costs for a particular base year. 

Key Differences: Triple Net Lease vs. Gross Lease

The fundamental difference between a triple net lease and a gross lease is how expenses are allocated between the landlord and tenant:

• Gross Lease: The tenant pays a single, fixed rent, and the landlord covers all additional operating expenses. This makes financial planning easier for tenants but usually results in higher base rent.
• Triple Net Lease: The tenant pays a lower base rent but is also responsible for property taxes, insurance, and common area maintenance (CAM) expenses. This structure can benefit tenants who actively manage costs and landlords who prefer minimal financial responsibility.

Triple net leases are common in retail and industrial properties, while gross leases are typically found in office buildings and multi-tenant spaces. Choosing the right lease type depends on financial strategy, risk tolerance, and operational needs.

In a later article within this series, we will explore the reconciliation process of triple net leases. 

3. Industrial vs. Warehouse vs. Office Leases

Industrial Leases: Industrial spaces cater to manufacturing, production, and heavy-duty operations. These properties often include features such as high ceilings, loading docks, and robust utility infrastructures. Lease agreements for industrial spaces typically include terms that address zoning compliance, equipment installations, and environmental regulations.

Warehouse Leases: Warehouses are primarily used for storage and distribution purposes. Unlike industrial properties, warehouses may have minimal office space and fewer modifications for specialized operations. Lease agreements focus on aspects such as accessibility, storage capacity, and security requirements.

Office Leases: Office spaces are leased for professional, administrative, or corporate operations. These leases range from small single-suite offices to multi-floor corporate headquarters. Lease terms may include provisions for common area maintenance (CAM), tenant improvement allowances, and rent escalation clauses.

Leveraging Leases for Business Advantage

Businesses can leverage lease structures to optimize financial and operational efficiency.   Understanding market conditions is critical in identifying your respective negotiating leverage. Lease rates fluctuate based on market supply and demand, as well as location and type of property. Knowing market trends can help secure competitive rates and other favorable terms.

 Key considerations include:

• Negotiating Favorable Terms: Tenants should negotiate improvement allowances and renewal options to maximize benefits.
• Flexibility and Scalability: Choosing the right lease type ensures that a business can scale operations without unnecessary financial burdens.
• Rental rates: The most obvious term in any lease is the square footage rent. Often, though, Landlords would prefer to provide concessions in the form of rent abatement, in order to keep the stated rent per square foot higher. 

Understanding the various types of commercial leases helps both landlords and tenants make informed decisions, ensuring alignment with financial and operational goals. Whether selecting a gross or triple net lease, exploring lease-to-own options, or securing the right type of commercial space, careful lease negotiation is essential to a successful business.

If you have any questions regarding commercial leases, contact Ted McGinn at tmcginn@lavellelaw.com or 847-705-7555 to schedule a consultation.