Commercial real estate offers several lease types, depending on owners' and tenants' expectations and requirements. These include the gross, percentage, net, and variable leases.
The full-service/gross lease is common for retail and office space and involves the payment of a flat, single payment that combines rent and elements such as utilities, property taxes, and insurance. The landlord receives the tenant payment and allocates money to taxes, insurance, and utilities from the total amount received. On their part, the tenant pays a set flat rate, whatever the specific monthly usage and rates, with the landlord allocating payments from this. While this tends to be relatively expensive for the renter, it is also simple to budget for, as the rate does not change across the duration of the lease.
Net leases involve the renter paying a set rent amount and incidental costs, saving the owner the trouble of collecting and paying monthly expenses. The tenant is responsible for rent, utilities, and a proportional amount of operating expenses such as insurance, taxes, and maintenance. The latter are often billed as common area maintenance (CAM) fees and divided proportionately among all building tenants. They might include janitorial services for common areas such as lobbies, hallways, and restrooms, waste removal, and any needed repairs.
The net lease formula has various iterations, including the triple net lease (NNN), which stipulates that the tenant is responsible for base rent and utilities, insurance, property taxes, and CAM fees. Double net leases (NN) limit tenant responsibility to insurance and taxes, while single net leases (N) make only property insurance the tenant’s responsibility.
While triple net leases require tenants to outlay for all, or a portion of, building repair expenses (such as roof, floor, escalator, or structural repairs), the landlord will sometimes bear responsibility for certain repairs. With absolute NNN leases, the landlord is not responsible for building expenses. The tenant has taken ownership of the building without an outright purchase, which tends to lower the rent substantially. Such arrangements are most commonly negotiated by major retailers with a nationwide or regional presence and proven creditworthiness.
Modified leases represent a middle ground between net and gross leases. They make certain expenses the tenant's responsibility, with the landlord covering other expenses. For example, the contract may make the landlord liable for utilities such as electricity and heating while making the tenant responsible for waste removal services. Another arrangement is to have the tenant pay for a proportionate share of operating expenses above a predefined threshold. This limits how much the landlord pays for utilities and other fees beyond a set and predictable amount.
The variable lease is another common type of commercial arrangement. As the name suggests, payments fluctuate depending on economic circumstances or property market conditions. It spans two basic types: graduated leases and index leases. The latter is tied to an index, whether rental market rates in the local area or the Consumer Price Index. For example, a tenant may negotiate rent annually based on average office or retail rents in the local community.
Graduated lenses establish a schedule of predefined rent increases at the contract outset. For example, the contract may stipulate a yearly rent increase each December. In areas where seasonal and tourist business prevails, the rent may rise yearly during the high season and drop during the low season.
