Types of Commercial Real Estate Leases

The Ivy Group - Types of Commercial LeasesThere are many types of leases that landlords and tenants must consider when it comes to leasing.

Below are a few examples of common types of commercial leases.

Fixed - Full Service - Flat Lease

Tenant pays a base rent only, all expenses, including the tenant use of utilities, are paid by the landlord.
Typically used in large office buildings.
Gross Lease Tenant pays a base rent and all expenses are paid by the landlord. However, tenant pays its own use of utilities, like gas and electric.

Typically used for office/retail buildings.
Modified Gross Lease As name implies, a modified lease is a Gross Lease but “modified” to pass-through certain expenses to the tenant, like janitorial and repairs, or others negotiated before signing the lease.

Modified Gross lease is also used when landlord bills tenant for “increases” of expenses from base year.

Typically used in medical and industrial buildings.
Net Lease Tenant pays a base rent plus some or all operating expenses for its percentage share of property (prorata).

If it is a Single Net Lease (N), tenant pays base rent plus one of the operating expenses, either property tax, Insurance or CAM charges.

In a Double Net Lease (NN), tenant pays base rent plus two of the operating expense, usually Property Tax and Insurance.

In a triple Net Lease (NNN), tenant pays for all operating expenses. Most of the time, in a NNN lease capital improvements, such as new roof, will not be billed back to tenants.

Typically used in retail shopping centers.
Absolute Triple Net (NNN) Tenant pays base rent and pays all the operating expenses including capital improvements. In this type of lease, landlord doesn’t even see the bills; tenant pays the property tax, insurance, CAM and capital improvements directly to vendors.

Typically used in Single Tenant properties and Sale-lease back transaction with long leases.
Ground Lease Another version of Absolute Triple Net Lease where the landlord leases the ‘grounds’ only, technically the building belongs to the tenant, when lease is over the building “reverts” back to the landlord. In this scenario, the tenant gets to depreciate the building not the landlord.
Typically used for single tenant property.

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