When negotiating that business lease, it's imperative to know what type of lease your landlord is proposing.
Most commercial leases will fall into one of several categories - gross, double net, triple net and absolute triple net lease. The form of lease will determine what your final monthly costs are going to be. By the time you add in the various expenses - maintenance, taxes, common area costs, gas and utilities, etc - you may find that the cost of leasing the space is more than your revenues can support.
What is a gross lease?
Under a gross lease the tenant pays the rent and the utility, phone and wireless bills. The landlord pays all other expenses related to the premises, including maintenance, repairs and improvements. However, all of these costs are included in the amount of the rent, so you'll probably be making a significantly higher monthly rent payment than you would be paying under a net lease.
How is this different from a double net lease?
The terms of a double net lease put the responsibility on the tenant for paying the operating and maintenance expenses, taxes and insurance. The landlord is responsible for any expenses involving the building, such as structural issues, roof repairs, etc. This is the most common type of lease used for retail and office space.
What is a triple net lease?
The triple net lease (also known as a net net net lease) is a leasing arrangement in which the tenant pays not only the rent but also the costs of building maintenance, insurance and property taxes. This type of lease is often used for warehouses and manufacturing facilities.
Which type of lease will cost me the most as a tenant?
The absolute triple net lease places the heaviest burden on the tenant. An absolute triple net lease includes everything that a triple net lease does, but the tenant is also responsible for covering any additional expenses relating to the property that are not included in triple net leases, such as structural and roof repairs and maintenance. The landlord has no financial or managerial responsibilities with respect to the tenancy, and is only responsible for making mortgage payments on the land and paying its own income tax.
What is a percentage lease?
Percentage leases are widely used for shopping center tenants. The rent is calculated as either:
- a percentage of gross sales;
- a fixed monthly rent plus percentage of gross sales;
- the greater of a fixed amount or percentage of sales; or
- a base fixed amount plus a tiered percentage of sales.
In addition to lease payments and the expenses, the tenant also pays a portion of the common area maintenance costs. How much that amount would be depends on the size and age of the building and the number of tenants who are sharing the common area costs.
