Understanding the Basics of Commercial Real Estate Leases

Contributed by Edward McGinn, Licensed Real Estate Broker, CCIM

 

A commercial real estate lease is a long-term commitment, and like all long-term commitments in life, you want to be sure you know exactly what you are getting into. It is crucial for both the property owner and tenant to understand which expenses are included and excluded from the lease; this will help to avoid any future confusion after signing on the dotted line. Many components affect the rent, which is why the structure of the lease is important. Although there are various types of commercial real estate leases in Buffalo, NY , there are three lease structures that are the most common. These include gross lease (also known as a full-service lease), net lease, and modified gross lease. The similarity among these three commercial real estate lease types is that they provide a base rent with different scenarios which detail whether the property owner or tenant pays for the operational expenses like property taxes, property insurance, and common area maintenance (CAM). Let’s dive into some details on the three most common types of commercial real estate leases:

 

1. Gross Lease (Full-Service Lease)

A gross lease consists of a flat rent fee that includes all operating expenses. This means that the property owner is responsible for paying taxes, insurance, CAM, interior maintenance, janitorial, utilities, and other expenses associated with the commercial space. The property owner uses the tenant’s rent to pay for these commercial property expenses, resulting in a relatively higher base rent for the tenant. This type of lease is common when renting office space.

One of the biggest benefits of a gross lease is that the fixed rent is the only cost to the tenant. The ability to have predictable payments allows tenants to focus on their business and not the day-to-day operational costs of the building. This also means that when building expenses fluctuate, it does not directly affect the rent. For example, during the summer when the cost of cooling increases because of the usage of air conditioning, rent remains the same for the tenant regardless.

It is important when negotiating a gross lease to review any “escalation clauses”. These can account for increases in insurance, taxes, excess janitorial services, and depending on the lease, can allow the property owner to increase the tenant’s rent based on these variable costs.

 

2. Net Lease

There are three “nets” in commercial real estate: property tax, property insurance, and CAM. Net leases have a lower base rent than a gross lease but, ultimately, that rent depends on if the tenant is responsible for paying one or all of the three property operating expenses. Net leases are common when renting retail and industrial space. There are four types of net leases that deal with these expenses:

Single Net Lease (N Lease):

In a single net lease, the tenant agrees to take on a single property operating expense. For example, a single net lease can require the tenant to pay their portion of the property taxes in addition to rent. The commercial property owner is responsible for the property insurance and CAM, but the tenant pays utilities and other services directly.

Double Net Lease (NN Lease):

A double net lease agreement requires the tenant to pay rent, along with his or her portion of the property taxes and property insurance. The property owner will pay for CAM, but just like the single net lease, the tenant is still responsible for his or her own utilities and other services.

Triple Net Lease (NNN Lease):

A triple net lease agreement requires the tenant to pay base rent and all three “nets”. This includes their portion of the property taxes, a portion of the property insurance, and CAM. Although the total amount of all of these expenses may be the same as in a gross lease, the tenant must be more responsible in tracking each payment.

Absolute Triple Net Lease:

In addition to the responsibilities of a triple net lease, an absolute triple net lease holds the tenant responsible for every potential real estate risk. For example, if there is a catastrophe that damages the commercial space, responsibility is on the tenant to respond to the situation. The tenant receives all the advantages and disadvantages of owning a building, without actually having to buy one. This is one of the most uncommon commercial real estate leases due to the high risk associated with it.

 

3. Modified Gross Lease

A modified gross lease was developed to be the middle ground for both tenants and property owners. This type of lease is similar to a gross lease in that rent is requested in one lump sum which, depending on what the property owner and tenant agree on, can include property taxes, insurance, and CAM. Typically, the utilities and janitorial services are excluded from the rent and independently covered by the tenant. Since this lease type is the happy medium between a gross lease and a net lease, it is commonly found among a variety of different building types.

While each type of commercial real estate lease helps standardize a tenant’s expenses, they do not represent absolute rules. All Buffalo, NY buildings, owners, and circumstances are different. Similarly, all leases are negotiable, and the best way to completely understand which lease is best for you and your business is to talk to the people who work in commercial real estate every day. Ciminelli Real Estate Corporation has an average agent tenure of over 20 years in the commercial real estate business, with a brokerage team that handles commercial real estate leases day in and day out.

 

Contact Ciminelli Today!

If you are looking to lease commercial real estate in Buffalo, NY, or are looking for more information on commercial real estate services, call Ciminelli Real Estate Corporation at 716.631.8000.