The Different Types of Commercial Leases
You're ready to hang out your shingle or otherwise go into business for yourself, but you need space, a place from which to run your operation. If you're wading into the world of commercial leases for the first time, you might feel a little overwhelmed by all the different terms that are thrown about. You might be unsure what you're getting into.
Those terms are not actually as intimidating as they sound, however. Here's a chart you can use to identify the type of commercial lease you're being offered and what it means to your bottom line, along with some definitions for various terms. Types of commercial leases can overlap, so it's important to focus on how rent and other fees are calculated.
Types of Commercial Real Estate Leases
|Type of Lease||Rent Basis||Often Used In|
|Percentage Lease||Base Rent + Percent of Monthly Sales||Retail Businesses; Malls|
|Net Lease||In addition to rent, tenant pays some or all of taxes, insurance, or maintenance.||Any commercial lease; usually favors landlord’s interests.|
|Double Net Lease||Tenant pays rent + taxes and insurance.||Any commercial lease; usually favors landlord’s interests.|
|Triple Net Lease||Tenant pays rent + taxes, insurance, and maintenance.||Any commercial lease; usually favors landlord’s interests.|
|Fully Serviced Lease (Gross Lease)||Landlord directly pays all or most usual costs. These costs are often passed on to the tenant in rent as a “Load Factor.”||Office, Some industrial and retail leases.|
Ok, so what does all this really mean? The following is a list of some of the terms you'll want to make sure you understand, and some tips to help you remember what these different leases mean when you're negotiating and thinking on your feet.
- Base Rent: This is the very least you'll have to pay each month – other fees, if any, are added to this amount. Think of it as the base of a hill or mountain.
- Double Net Lease: "Double" means two additional costs will be added to your base rent: tax and insurance costs incurred by the landlord.
- Fully Serviced Lease: Also called a gross lease, your landlord will take responsibility for paying for most of the "extras," but make no mistake, they will most likely trickle down to you as a "load factor." You can think of "fully serviced" as "it includes everything," but your rent will most likely be substantially more than "base rent."
- Load Factor: Load factor is a method of calculating total monthly rent costs combining usable square feet with a percentage of the square feet of common areas used by all tenants. Common areas typically include restrooms, 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 actually renting as your store or office – is substantially equal, your percentage contribution toward the common areas might be 25 percent or so.
- Net Lease: This is a somewhat undefined version of a double or triple net lease. You'll pay for some taxes, insurance and maintenance costs incurred by the landlord, if not 100 percent of one or all of them. The percentage can often be negotiable.
- Percentage Lease: The word "percentage" does not relate to the usable square feet you can claim as your own in a commercial building nor the percentage of taxes, insurance, and maintenance you might pay as part of a net lease. It's a percentage of your monthly sales over a certain threshold. You might expect to pay this if you rent retail space in a mall.
- Rentable Square Feet: This is your usable square feet plus your percentage of the common area square footage.
- Triple Net Lease: "Triple" means three additional costs over and above your base rent: taxes, insurance, and maintenance.
So there you have it. Go out and negotiate your lease like a pro.