Often when I consult with small business clients, they have a maximum monthly amount budgeted for rent payments. Whether it is multiple checks to the landlord for various utilities each month, or a single check to the landlord, the tenant often pays most, if not all, of the expenses associated with the property. The total monthly expense is called Net Effective Rent. Below is a detailed discussion describing the five most common types of leases, as well as who utilizes and/or benefits from each.
The Percentage Lease is an additional rent payment that must be paid on a percentage of gross sales. This additional rent payment is on top of, or in place of the base rent. This type of lease is typically used for tenants in retail spaces, such as shopping and strip malls.
The owner can command this additional rent payment due to the added incentive of attracting customers by carefully selecting which businesses will be included in the retail space. For example, having a barber shop, clothing store, dry cleaners, and restaurant all in the same retail space will potentially entice customers to visit the various shops in that same retail strip. This added benefit and capability to attract customers can allow the owner to negotiate a percentage of the gross sales.
Net Leases
A net lease requires that in addition to the base rent, the tenant must also pay at least one, if not more, of the following expenses: property taxes, property insurance premiums, and/or maintenance costs. Traditional leases typically require that the landlord pays the property taxes, insurance premiums, and maintenance costs. However, these costs are commonly built into the annual rent and passed on to the tenant. Net leases are utilized more commonly by landlords to avoid the risk of unexpected increases in expenses.
Three basic types of net leases exist. They are as follows:
- Single-Net Lease – For this type of lease, the tenant must pay both the rent and the property taxes. This is the least commonly used type of net lease as much of the risk remains with the landlord.
- Double-Net Lease – The tenant must pay the rent, property taxes, and property insurance premiums. Exterior maintenance costs are paid exclusively by the landlord. This is one of the more popular lease types used in commercial real estate transactions.
- Triple-Net Lease (also known as NNN) – This type of lease requires that the tenant pay the rent, property taxes, property insurance premiums, and the maintenance costs. This lease removes most of the risk from the landlord and transfers it to the tenant. Another triple-net lease known as a Bondable Net Lease, is often used by landlords to prevent an adjustment of the rent for any reason or a termination of the lease contract before its expiration date.
A Gross Lease provides a tenant-friendly rent payment that is all-inclusive. The landlord is responsible for paying all or most expenses including property taxes, property insurance premiums, and maintenance costs out of the rents received from tenants.
This type of lease is a favorite among tenants. It allows the tenant to focus on their day-to-day business goals and objectives and less on unexpected expenses. The landlord is completely in charge of maintaining the property. This often times includes janitorial services and providing utilities, such as electricity.
Navigating the various types of commercial real estate leases can be unnerving and confusing. With more than 15 years of real estate sales and development experience, along with a proven track record of success throughout all sectors of commercial real estate leasing, The Vanguard Commercial Group can assist you with finding a commercial property and securing the best lease for your business needs. Contact us today to discover how we can save you time, money, and assist you with the small and large details of your commercial real estate decisions.
For more information, please contact:
Murphy D. Cheatham II, MRED, HDFP, EDFP
Premier Agent
(214) 945-6201
mcheatham@vanguard-re.com
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