When a tenant and landlord enter an agreement for a commercial property, a decision for the lease needs to be established. There are three different main real estate leases that can be entered into, each with distinct advantages and disadvantages. Regardless of what agreement you have, it is important for you to carefully read the lease details so you know what is expected in any situation. The three most common types of leases are gross leases, net leases, and modified gross leases.
1. The Gross Lease
The gross lease tends to favor the tenant. The most notable characteristic of this kind of agreement is that the tenant pays one large sum. The landlord is responsible for paying insurance, utilities, janitorial services, and maintenance. Occasionally, the tenant will be required to pay electricity, water, or gas him or herself. Because more is required of the landlord, the amount the tenant pays is usually higher to compensate. A gross lease essentially makes it as easy as possible for the tenant to make payments so she or he can focus on operating and growing the business. Gross lease rates typically rise when the expenses for maintenance and utilities rise.
2. The Net Lease
The net lease, however, tends to favor the landlord. In this agreement, the base rent tenants pays is lower, but they must also pay maintenance fees of all kinds. Which fees the tenant must pay depends on the net lease.
•Single Net Lease – For single net leases, or N leases, the tenant pays the base rent, as well as his or her portion of the building’s property tax. For example, if the tenant is renting 1,000 square feet of a 2,000 square feet building, she or he would be responsible for 50 percent of the property tax. The landlord covers utility and maintenance costs.
•Double Net Lease – In double net leases, or NN leases, the tenant, again, pays the base rent and a portion of the property tax, but he or she is also responsible for utilities and janitorial expenses. The landlord still pays for maintenance and repairs.
•Triple Net Lease – Finally, triple net leases, or NNN leases, have tenants responsible for all fees, including maintenance, repairs, janitorial expenses, utilities, property tax, and, of course, rent. Note that the total amount paid may be the same as in a gross lease, but the tenant must be more responsible and keep track of where and when each payment must go out.
While the net lease favors the landlord, some tenants may prefer them because of the transparency they provide, as well as having more control over maintaining the space. Rent will increase for this kind of lease when the landlord’s costs increase.
3. The Modified Gross Lease
Finally, the modified gross lease was developed to be a middle ground between favoring the landlord and favoring the tenant. This kind of agreement still has tenants pay their amount in one large sum, but which fees they must also cover varies. The tenant and the landlord must discuss who will pay for maintenance, utilities, janitorial services, common area maintenance, and property taxes. This agreement also yields a more flexible and easier relationship between tenant and landlord.
Another unique feature of the modified gross lease is that the payment rates typically do not vary. This means if the cost of maintenance decrease, the landlord benefits and if the cost of maintenance increases, the tenant benefits.
Find the Lease for Your Business
It is up to you to find the lease agreement that works for your business best. There are advantages and disadvantages of each for you to consider. Most importantly, however, you should always review the terms of the lease, including negotiate caps, lengths, and which fees you are responsible for, carefully.
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