There are many variations on commercial lease structures. The three most commonly used are gross, net and percentage rent leases. Each type can be negotiated, and your lease may be a combination of the three.
A gross lease is straightforward and simple. The tenant pays a gross lump sum in rent every month. The landlord is responsible for paying the building’s property taxes, insurance, maintenance, and common area expenses. However, often some of these costs get passed on to the tenant, and you should ask your attorney about the property’s “load factor” where these hidden costs may appear.
Some gross leases are adjusted to exclude utilities or other tenant expenses, which the tenant then pays separately. These are called “Modified Gross Leases”.
The benefit for tenants to a gross lease is the certainty—the tenant knows exactly what the cost will be each month.
A net lease consists of a base rent amount plus various building-related expenses. The base rent in a net lease is usually significantly less than the amount of a gross lease, but the total amount the tenant pays may be more or less than in a gross lease, depending upon the “net” charges added.
There are several types of “net” leases. In a single net lease tenants pay a base rent plus the tenant’s pro-rated share of property tax, and the tenant’s own utilities. The landlord covers all other expenses. IN a double net lease, the tenant pays a base rent plus the tenant’s share of property tax and insurance premiums, along with tenant’s own utilities.
In a NNN, or “triple net” lease, probably the most common commercial lease type, the tenant pays a base rent, its own utilities, and its pro rata share of property taxes, insurance and common area maintenance costs, or CAMs. These costs can be unpredictable and may include expenses for equipment, supplies, maintenance, and any necessary repairs of the lobby, restrooms, elevators, stairwells, and hallways, as well as the salary of a lobby attendant or security guard. What is included in CAM charges is often a highly negotiated provision in commercial leases, and one every tenant should pay close attention to.
A percentage lease is less common than a NNN lease, but is often favored by landlords of retail malls. In a percentage lease, tenants pay a base rent plus a percentage of their gross sales. This type of lease can be beneficial for a tenant with a new or unproven concept, where cash flow is uncertain. Tenants will typically pay a much lower base rent, and their cost will only go up if their business is successful and their revenue rises.