Types of Commercial Real Estate Leases
An owner of commercial real estate is usually concerned with at least five types of expenses: (1) property taxes; (2) property insurance; (3) CAM expenses (the cost of common area maintenance, e.g. parking lots, sidewalks, and landscaping); (4) utilities; and (5) janitorial services.
Most commercial landlords will have their tenants pay for these expenses in some form or another. The manner in which the tenant’s payment is calculated is determined by the type of lease.
In commercial real estate there are generally three types of leases: (1) gross, (2) triple net, and (3) modified gross.
With a gross lease, the tenant pays one fixed monthly rent amount. The landlord then pays the expenses associated with the property from that fixed amount. This type of lease is good for landlords and tenants who like predictability and simplicity. Gross leases tend to be more tenant friendly because tenants know the exact amount they will be charged each month. They do not have to worry about surprise expenses, for example, an invoice for their proportionate share of repaving the parking lot.
Landlords should be careful not to enter into a gross lease with a tenant who might have huge electricity/utility usage, like a manufacturer with large equipment that uses a lot of power, or even a restaurant with large refrigeration costs or a retail store with extensive lighting.
Triple Net Lease
Triple net refers to the three main expenses associated with a commercial building: property taxes, property insurance, and CAM expenses. In a triple net lease, the tenant will pay a lower base rent and is responsible to pay a proportionate share of the aforementioned expenses.
If a tenant, for example, leases 10% of a property, and the landlord estimates the expenses to be a combined $1,000 for one month, the tenant will be charged $100 for that month on top of the base rent amount. Of course, with this type of lease, tenants also pay the costs of their own occupancy, like janitorial services and utilities.
Triple net leases tend to be more landlord friendly because landlords are guaranteed that their costs will be covered. Tenants considering entering a triple net lease will often try to negotiate a cap on the amounts they can be charged so that the landlord still has an incentive to keep costs low. Landlords should also be aware that with triple net leases, the tenants usually have the right to access the accounting records to ensure they are not being charged more than their share.
Modified Gross Lease
A modified gross lease is also sometimes called a modified net lease. It is basically a happy medium between a gross lease and a triple net lease, where the tenant will pay a base rent and then a portion of some, but not all, of the operating expenses.
At Crook & Taylor Law, we help commercial landlords and tenants negotiate commercial leases. We also assist with claims of breach of a commercial lease.