Have you ever wondered exactly what you’re paying for with your business’ monthly rent check? Did you know there are several types of lease agreements that divvy up your rent payment in different ways? Some are designed to protect the landlord, and others split the costs and risks more evenly. It’s a good idea to know the basics of each type of lease, but keep in mind, every lease is different.
The four most common leases agreements are the gross lease, modified net lease, triple net lease and percentage lease.
In a gross lease, the landlord pays the taxes, insurance and maintenance expenses. Gross leases are used most often for office and industrial spaces and some retail properties. A variation of the gross lease is the full-service lease in which the landlord also pays the electric, water, gas and janitorial expenses. Many gross leases include a provision that says as tax and insurance costs rise, tenants pay their share of that increase, usually in an annual lump sum.
The modified net lease is the most common. It’s a compromise between the gross lease and the triple net lease. The tenant is responsible for taxes and insurance, but the landlord splits maintenance costs with the tenant.
This type of agreement is used in industrial, office and retail buildings, and the terms of a modified net lease can be as different as the building and tenant business types. These leases can be flexible for both the tenant and landlord and protect the landlord from rising taxes and insurance more than the gross lease.
Landlords find the best protection in a triple net lease, or NNN lease. In a triple net lease, the tenants are responsible for all the taxes, insurance and maintenance, even if that means the roof needs to be replaced, for example. Tenants may agree to a NNN lease if the building is newer—there’s less risk of maintenance issues cropping up, and they’ll usually pay a lower base rent.
NNN leases are used mostly on freestanding buildings with strong tenants.
The percentage lease is found most often in the retail setting. The tenant pays a small base rent plus a percentage of monthly sales volume. Most percentage leases allow the tenant to build up to a specific sales amount before they begin paying the percentage.
With so many types of leases and all the possible variations in terms, it’s wise to get an expert’s help to negotiate the right lease for your business. Dave’s Endorsed Local Providers (ELPs) are commercial real estate experts in your area. You can trust them to save you time and money on your next lease. Contact your ELP today!
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