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Commercial Lease Types

Posted by capital on February 13, 2018
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The three primary commercial lease types used in real estate are  Full Service, Modified Gross, and Net Lease. The differences between each lease type are primarily defined by which operating expenses are included in the base rent. Given that lease terminology vary from market to market and even building to building it’s important for the tenant to understand exactly which operating expenses will be included as part of the base rent and which operating expenses will be paid in addition to the base rent and by whom. It may be easiest to think of leases as viewed on a continuum from Full Service at one end and Net Lease at the other end.

Full Service Lease: A full service lease is sometimes referred to as a gross lease in which all operating expenses are included in the base rent. This includes costs such as property taxes, building insurance, repairs, maintenance, management fees, utilities, and janitorial service.

Modified Gross Lease:  A modified gross lease includes fewer operating costs in the base rent. For example, a modified gross lease may include insurance but not property taxes. It’s important the tenant to ask and understand exactly operating expenses are included in the base rent and which expenses must be paid in addition to the base rent.

Net Lease: A Net lease is sometimes referred to as a triple net lease and is most often used associated with retail leases. The tenant pays all of operating expenses in addition to the base rent on a pro-rata basis. The costs, sometimes referred to as the triple nets, include common area maintenance(CAM), building insurance, and taxes. In addition the tenant pays their own utilities often times directly to the provider. There are certain definitions in CAM expenses that should be clarified and even excluded when negotiating a net lease. See more details HERE