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Understanding the diverse landscape of commercial leases

On Behalf of | Mar 1, 2024 | Real Estate Law

Commercial leases come in various forms, each catering to the specific needs of landlords and tenants in business real estate.

Understanding the distinctions among these lease types is helpful for individuals involved in commercial property transactions.

Gross leases

A gross lease, also known as a full-service lease, involves the tenant paying a fixed rental amount that covers most if not all, operating expenses. Landlords are typically responsible for property taxes, insurance and maintenance costs in this arrangement. Gross leases provide tenants with predictability in their monthly payments, simplifying financial planning.

Net leases

Net leases, in contrast, shift certain operating costs from landlords to tenants. This shift helps provide predictable income for landlords. There are three main types of net leases: single net, double net and triple net. Tenants cover property taxes in a single net lease; double net leases add insurance costs. Triple net leases include property taxes, insurance and maintenance expenses as the tenant’s responsibility.

Modified gross leases

Modified gross leases strike a middle ground between gross and net leases. Both parties in this arrangement share certain operating costs, such as property taxes and insurance. Maintenance costs, however, are typically borne by tenants. This hybrid structure allows flexibility in negotiating specific terms to accommodate both parties’ needs.

Percentage leases

Percentage leases are commonly used in retail settings. In this arrangement, tenants pay a base rent and a percentage of their gross sales. This structure aligns the business’s financial success with the rental costs, benefiting both landlords and tenants. It is particularly common in shopping malls and other retail spaces.

Ground leases

Ground leases involve the leasing of land rather than buildings. Tenants in ground leases have the right to use the land for an extended period. Typically used for long-term developments, ground leases often offer the option to build structures. This type of lease is prevalent in commercial real estate for large-scale projects.

Tailoring leases to specific needs

The diverse landscape of commercial leases allows landlords and tenants to tailor agreements to meet their specific needs. Understanding the characteristics of each type is essential for successful commercial property transactions.