Just as commercial real estate properties come in many forms, so do commercial real estate leases. Though every lease can be customized according to the peculiar features of the property, property owner interests, or business of the lessee, leases generally take the form of one of the seven common types of commercial real estate leases detailed below.
Glossary of CRE Lease Terms
An understanding of a few basic commercial real estate terms commonly found in leases is essential, for real estate agents, business owners, and property owners alike.
Operating Expenses
The operating expenses are certain costs associated with the operation and maintenance of a commercial property. Commercial operating expenses, as they relate to leases, include three categories of costs:
- Property Taxes: Taxing entities charge taxes to the property owner, paid annually or in two installments.
- Insurance: The property owner insures the building and grounds from damages and losses.
- Common Area Maintenance: These fees vary by property type and by landlord, but they typically include management fees, building maintenance, repairs, utilities, property lighting, parking lot maintenance, security services, and more.
Operating expenses should not include the owner’s debt service, marketing costs, capital reserves for future projects, or tenant improvements allowances.
Common Area Maintenance
Also referred to as CAM fees, common area maintenance expenses are allocated to tenants on a pro-rata basis, with tenants that have more square footage paying a greater percentage of CAM expenses. CAM fees can be variable or fixed, and they may be paid monthly, quarterly, or annually. These fees tend to be more variable and can escalate at a different rate than the monthly rent rate. Many commercial leases specify a maximum rate of increase or some other sort of cap.
Usable Square Footage
A space’s usable square footage is the total area unique to the tenant. For tenants who occupy an entire floor, the usable square footage includes everything inside the boundaries of the floor, including non-usable areas like electrical rooms as well as common areas like hallways. Usable square footage does not include elevator shafts or stairwells. For tenants leasing only a portion of a floor, the usable square feet includes all office spaces, private restrooms, and storage areas unique to the tenant. Columns or recessed entries are included in the calculation.
Leasable Square Footage
Leasable, or rentable, square footage, which determines the annual base rent expense, includes the usable square footage plus a portion of the building’s common space. The common space includes areas usable by all building tenants, including hallways, lobbies, and public restrooms.
Single Net Lease
In a net lease, the tenant pays a portion of the operating expenses, plus their monthly rent. In a single net lease, commercial tenants pay for one of the three major components of operating costs: property taxes, property insurance, or maintenance fees.
Double Net Lease (NN Lease)
In a double net lease, or NN lease, the tenant must pay two of the three major operating expenses, in addition to the base rent.
Triple Net Lease (NNN Lease)
Tenants are required to pay their monthly base rent as well as all operating costs. Most landlords tend to prefer this form of commercial property lease, since most of the risk and expense becomes the burden of the tenant.
Absolute Lease
Absolute leases require the tenant pay rent as well as all operating expenses, plus any repairs to the building’s roof and physical structure.
Full Service Lease
The opposite of a triple net lease, the full service lease places the burden of all operating expenses related to the unit on the property owner. In this commercial real estate lease form, also referred to as a gross lease, the tenant is only responsible for paying rent. To account for the operating expenses, most landlords increase the base price of rent. This type of lease poses a greater risk to the landlord, since unforeseen increases in the usual monthly expenses could occur.
Modified Gross Lease
With a modified gross lease, the tenant pays just their rent during the first year, and then also pays a portion of the operating expenses after the first year. Most commercial leases fall under this category, since both the tenant and landlord will be held accountable for a portion of the operating expenses. Though a common form of commercial real estate lease, the terms will vary greatly from landlord to landlord.
Percentage Lease
A percentage lease applies to retail commercial properties only, with this lease type most commonly found in shopping centers and strip malls. The tenant pays rent plus a percentage of their monthly gross sales. Base rent usually is based on a per square foot basis, but the percentage will vary across landlords. Because these retail types of properties are designed and occupied in a way intended to bring in foot traffic to benefit the businesses located there, property owners require a percentage lease because of the inherent benefit.
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