When a tenant and landlord enter an agreement for a commercial property, a decision for the lease needs to be established. There are three different main real estate leases that can be entered into, each with distinct advantages and disadvantages. Regardless of what agreement you have, it is important for you to carefully read the lease details so you know what is expected in any situation. The three most common types of leases are gross leases, net leases, and modified gross leases.
1. The Gross Lease
The gross lease tends to favor the tenant. The most notable characteristic of this kind of agreement is that the tenant pays one large sum. The landlord is responsible for paying insurance, utilities, janitorial services, and maintenance. Occasionally, the tenant will be required to pay electricity, water, or gas him or herself. Because more is required of the landlord, the amount the tenant pays is usually higher to compensate. A gross lease essentially makes it as easy as possible for the tenant to make payments so she or he can focus on operating and growing the business. Gross lease rates typically rise when the expenses for maintenance and utilities rise.
2. The Net Lease
The net lease, however, tends to favor the landlord. In this agreement, the base rent tenants pays is lower, but they must also pay maintenance fees of all kinds. Which fees the tenant must pay depends on the net lease.
•Single Net Lease – For single net leases, or N leases, the tenant pays the base rent, as well as his or her portion of the building’s property tax. For example, if the tenant is renting 1,000 square feet of a 2,000 square feet building, she or he would be responsible for 50 percent of the property tax. The landlord covers utility and maintenance costs.
•Double Net Lease – In double net leases, or NN leases, the tenant, again, pays the base rent and a portion of the property tax, but he or she is also responsible for utilities and janitorial expenses. The landlord still pays for maintenance and repairs.
•Triple Net Lease – Finally, triple net leases, or NNN leases, have tenants responsible for all fees, including maintenance, repairs, janitorial expenses, utilities, property tax, and, of course, rent. Note that the total amount paid may be the same as in a gross lease, but the tenant must be more responsible and keep track of where and when each payment must go out.
While the net lease favors the landlord, some tenants may prefer them because of the transparency they provide, as well as having more control over maintaining the space. Rent will increase for this kind of lease when the landlord’s costs increase.
3. The Modified Gross Lease
Finally, the modified gross lease was developed to be a middle ground between favoring the landlord and favoring the tenant. This kind of agreement still has tenants pay their amount in one large sum, but which fees they must also cover varies. The tenant and the landlord must discuss who will pay for maintenance, utilities, janitorial services, common area maintenance, and property taxes. This agreement also yields a more flexible and easier relationship between tenant and landlord.
Another unique feature of the modified gross lease is that the payment rates typically do not vary. This means if the cost of maintenance decrease, the landlord benefits and if the cost of maintenance increases, the tenant benefits.
Find the Lease for Your Business
It is up to you to find the lease agreement that works for your business best. There are advantages and disadvantages of each for you to consider. Most importantly, however, you should always review the terms of the lease, including negotiate caps, lengths, and which fees you are responsible for, carefully.
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FAQs
A gross lease, or a full-service lease, is the most common type of lease. A gross lease has a predetermined rent that covers costs associated with owning the property, including things like tax, building insurance, and maintenance.
What type of lease is best for a landlord? ›
A month to month lease can offer you a lot of leverage as a landlord. If you're worried about being locked into a long-term lease with tenants, M2M leases are handy as it is easier for landlords to not renew the lease if you end up with a bad tenant.
What are all leases classified as? ›
If the agreement contains a lease, it must be classified as either an operating or a finance lease and the appropriate object code must be used for transactions related to the lease.
What is leasing in business? ›
Leasing allows your business to use an asset in exchange for rental payments, which may include an advanced rental, over a set period. A lease works as a rental agreement. You agree to rent an asset for a period with a fixed or minimum term and make regular rental payments for as long as the lease contract runs.
What is the most used commercial lease? ›
There are three different types of net leases: single, double and triple net lease. A triple net lease, sometimes known as an NNN lease, is the most common type of commercial lease.
What are the types of direct lease? ›
How Does Direct Lease Work? Direct lease is divided into two types: bipartite and tripartite.
What is the most common type of tenancy? ›
Understanding The Different Ways To Own Property
Tenancy in common is one of the most common types of property ownership. The others are tenancy in severalty, joint tenancy and tenancy by entirety.
How to classify a lease? ›
A lease is classified as a finance lease by a lessee and as a sales-type lease by a lessor if ownership of the underlying asset transfers to the lessee by the end of the lease term. This criterion is also met if the lessee is required to pay a nominal fee for the legal transfer of ownership.
What type of finance is leasing? ›
A finance lease or capital lease is a financial product, in which a leasing company gives operating control of an asset to a business for an agreed period, and typically at the end of the contract, the lessee will become the owner of the asset at the end of the lease, and both parties share some of the economic risks ...
How do you explain leasing? ›
A car lease works by essentially renting a vehicle, rather than purchasing it outright with a loan or cash. Typically, you'll need to make an upfront down payment and monthly payments in exchange for the right to drive the car for several years.
There are different types of leases, but the most common types are absolute net lease, triple net lease, modified gross lease, and full-service lease. Tenants and proprietors need to understand them fully before signing a lease agreement.
Which type of lease produces the lowest risk? ›
Operating leases can help to minimize the risk of obsolescence and equipment failure as the lessee does not assume ownership of the equipment or asset during the lease term.
What does nnn stand for? ›
A triple net lease (triple-net or NNN) is a lease agreement on a property where the tenant promises to pay all expenses, including real estate taxes, building insurance, and maintenance. These expenses are in addition to the cost of rent and utilities. NNNs are one type of commercial property net lease.
What are Type A and Type B leases? ›
The income statement treatment of Type A (financing) and Type B (operating) leases is different. For financing leases, lessees will recognize amortization of the ROU asset separately from interest on the lease liability. For operating leases, lessees will recognize a single total lease expense.
What are the four primary types of leases and what are their characteristics? ›
The four primary leases are NNN, gross, modified gross, and absolute net. NNN leases are the most common type of property management lease, where the tenant pays property taxes, insurance, maintenance costs, and rent payments.
What is the difference between cam and nnn? ›
One “N” stands for property taxes, one for property insurance, and the final “N” stands for common area maintenance (CAMs). Triple Nets are often wrongfully referred to as “CAMs” but technically CAM is just one portion of the triple nets, and insurance and property taxes are the other portions.
What is a finance lease vs. operating lease? ›
An operating lease is a contract that permits the use of an asset without transferring the ownership rights of said asset. A finance lease is a contract that permits the use of an asset and transfers ownership after the lease period is complete, and the lessor meets all other contract obligations.
