The Different Types of Commercial Leases
There are five basic types of commercial lease you are likely to encounter when you're looking for space from which to run your business. These leases vary according to what you, the tenant, are responsible for paying for and how the rent is calculated.
Types of Commercial Real Estate Leases
|Type of Lease||Rent Basis||Often Used for|
|Gross lease (fully serviced lease)||The landlord pays for all of the usual costs of owning the property, so the tenant directly pays only for rent. All of the leases in this table may be determined, at least in part, by the space's load factor.||Offices; some industrial and retail leases|
|Percentage lease||Base rent plus a percentage of monthly sales above a predetermined amount||Retail businesses, especially in malls|
|Single net lease||In addition to rent, the tenant pays for the property taxes.||Any commercial lease. It usually favors the landlord’s interests.|
|Double net lease||The tenant pays rent plus property taxes and insurance.||Any commercial lease. It usually favors the landlord’s interests.|
|Triple net lease||The tenant pays rent plus taxes, insurance, and maintenance.||Any commercial lease. It usually favors the landlord’s interests.|
Here are further explanations of those types of leases as well as definitions of some of the key terms in the table.
- Gross lease: Also called a fully serviced lease, this type of lease has the tenant paying only for rent. Your landlord will be responsible for paying the usual costs associated with owning a property: taxes, insurance, and maintenance.
- Load factor: Load factor is a method of calculating monthly rent costs by combining usable square feet with a percentage of the square feet of common areas used by all tenants to arrive at your rentable square feet. Common areas typically include restrooms, the lobby, elevators, stairwells, and hallways. If you share a building with three other tenants and each of your usable square feet—the area you're renting as your own usable space that other tenants may not occupy—is substantially equal, your percentage contribution toward the common areas should be 25 percent or so.
- Base rent: This is the least amount you'll have to pay each month. Other costs, if any, are added to this amount.
- Percentage lease: The "percentage" refers to the percentage of your monthly sales over a set amount that you will pay to your landlord in addition to the base rent. For example, the leasing agreement might state the tenant has to pay 5% of any gross sales above $200,000. If gross sales are $225,000 one month, the tenant must pay an extra $1,250 ($25,000 x 0.05) in rent. You will probably be expected to sign this type of lease if you want to rent retail space in a mall.
- Single net lease: Under this type of lease, you'll pay for property taxes in addition to your base rent.
- Double net lease: The "double" means two extra costs will be added to your base rent: taxes and insurance.
- Triple net lease: The "triple" means three extra costs will be added to your base rent: taxes, insurance, and maintenance.
Because of the extra costs tacked on for net leases, the base rent for those kinds of leases is often a good deal lower than for a gross lease. However, net leases are still designed to make life easier—and the rented space more profitable—for property owners, and you should negotiate them with caution and perhaps with the help of an attorney.