A commercial lease governs the relationship between a landlord and a commercial tenant. There are seven main types of commercial leases, each of which comes with a different set of terms and expectations.
- Triple Net Lease (NNN)
- Absolute Lease
- Double Net Lease (NN)
- Single Net Lease (N)
- Full Service Lease (Gross Lease)
- Modified Gross Lease
- Percentage Lease
This article outlines the typical terms and stipulations in the above commercial leases. However, the details of every lease can be different. Be sure to review your lease with an expert to make sure you understand all the details.
Triple Net Lease (NNN)
Triple net leases, like all net leases, allow the landlord to charge a lower base rent. The landlord then passes on a series of expenses related to the operation and maintenance of the building (also known as CAM charges) to each of the tenants on a pro-rata basis.
Triple net leases are also known as “net net net leases” or as “NNN leases.”
In a triple net lease, the tenant pays all three of the “nets”:
- Property taxes
- Insurance on the building
- Common area and maintenance costs
If a tenant was renting 1,000 square feet in a 10,000 square-foot commercial building under a triple net lease, they would pay their base rent and would pay 10% of the building costs, or nets.
Triple net leases are the most popular type of commercial lease for free-standing buildings with a single tenant. Triple net leases are common in industrial properties and single-tenant retail spaces. All net leases generally favor landlord interests.
The absolute lease, or absolute triple net lease, is much less common than the standard triple net lease. It is the most stringent of all of the commercial leases in this article. In an absolute lease, the tenant caries every risk imaginable, including construction expenses and rebuilding costs from catastrophes. In fact, tenants in an absolute lease still have to pay rent even if the building is condemned.
The absolute lease is only applicable to single-tenant buildings. As such, the tenant is typically a credit tenant where the company is large enough to self-insure or carry their own insurance.
Real estate investors often prefer this type of commercial lease because it makes the property easier to manage. Additionally, a good credit tenant in an absolute lease will command a higher valuation if you were to sell the building.
Double Net Lease (NN)
A double net lease, also known as a “net net lease” or a “NN lease,” is similar to a triple net lease. The landlord charges a lower base rent in exchange for the tenant carrying a percentage of the costs for operating and maintaining the building.
In a traditional double net lease, tenants pay:
- Property taxes
- Insurance on the building
The landlord is responsible for the common area and maintenance costs.
Double net leases are common for industrial tenants and some retail tenants.
Single Net Lease (N)
Single net lease, also known as a “net lease” or “N lease,” is uncommon. As you would expect, it is similar to the other types of net leases except the tenant pays a base rent, and a single “net,” usually the property taxes.
However, there are many variations of the single net lease. Some singe net leases pass on the insurance or maintenance costs instead of the property taxes.
Single net leases, when they are used, are typically made with industrial tenants.
Full Service Lease or Gross Lease (FSG)
A full-service lease is the opposite of a net lease. It is also known as a gross lease, full-service gross lease, or FSG lease. Typically, a full-service commercial lease is more favorable to the tenants than its net lease counterparts.
In a full-service lease, the landlord bears all the costs of property taxes, insurance, and common area maintenance. Consequently, the tenant pays a higher base rent to compensate the landlord for their additional costs.
The exact terms of each full-service lease will be different. Often the tenants will still pay for janitorial services within their lease. Many full-service commercial leases have a provision that caps the utility costs the landlord will pay. Consequently, tenants that use a large amount of electricity may owe additional rent to cover a part of their utility costs.
Full service commercial leases are most common in office space, some industrial and retail leases.
Modified Gross Lease
The modified gross lease, sometimes called a modified net lease, is a compromise between the triple net lease and the full-service lease. In a modified gross lease, the tenants still pay a single lump sum rent to the landlord. However, the landlord and tenant negotiate which of the “nets” are included as part of the rent.
Most often, these leases do not include electricity or janitorial. The tenants are responsible for making arrangements for these services.
Modified gross leases are most common in office properties. Though less common, they can also be made with industrial and retail tenants.
The percentage lease has two main components, base rent and percentage of sales.
Typically, these leases have what’s known as a break-point. Before the tenant’s sales reach the break-point, they only pay the base rent. After the tenant’s sales reach the break-point, they begin paying a percentage of their sales to the landlord in addition to their base rent.
The landlord will usually be responsible for the “nets”. A percentage lease is common in retail leases, such as shopping centers and malls. Tenants like the low fixed costs in a percentage lease. Landlords enjoy upside if they do a good job creating foot traffic for their tenants.
The percentage lease aligns incentives for landlords and tenants.
Sometimes, percentage leases will have strict requirements for the tenants that cover store operating hours, signage, and days open. The landlord may be able to fine the tenant if they fail to open on time or choose not to be open on a day the lease stipulates the store must be open.