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Different Types of Commercial Office Leases: Who Pays for What?
With commercial real estate leasing there are various types of leases, each corresponding to different responsibilities and obligations of the landlord and the tenant. What this means for you, as a tenant, is that the type of lease you sign determines the amount you are accountable to pay in terms of rent and additional costs. Since a typical office lease lasts 5 years, it’s important to sign a lease that fits the needs of your firm (some leases can extend longer).
There are multiple types of commercial property space that can be leased: retail, office, industrial, and land. Our focus is on the leasing of office space. There are two main categories of lease types when leasing office space—gross and net leases, which can further be broken down into a variety of subtypes that assign different degrees of financial responsibility to both tenant and Landlord. With both types, the tenant pays a base rent for the space. The type of lease determines whether the tenant of the landlord pays for the operating and additional expenses. If you’re feeling overwhelmed, don’t worry! We will take you through the various lease types to help you understand all of your options.
1. Gross Lease
Fully Serviced Lease/ Full Service Gross Lease:
The tenant only pays rent. The landlord directly pays all/most costs that are passed onto the tenant in the form of rent. The monthly rental fee is designed to cover operating expenses such as utilities, maintenance, repair costs, and the various other expenses the landlord incurs to run the building. Think of it as paying one all-inclusive flat fee in exchange for using the space. The main advantage with a gross lease is a known, fixed, and exact rental amount, regardless of usage. This could come in handy during summer months when you want to run the air conditioning!
Modified Gross Lease:
This type of lease is similar to the full service gross lease, but allows for more adjustment to the needs of the landlord and the tenant. The rental payment is still a fixed, lump sum but additional fees can be negotiated. A lot of negotiation is necessary when it comes to who pays for which additional expenses, as well as determining the rental amount. Think of this lease type as the middle ground between the landlord and the tenant.
2. Net Lease
Net leases usually favor the landlord and should always be negotiated. Under a net lease, the tenant is responsible for payment of the space and payment for all or some part of unusual costs. Unusual costs are the expenses associated with using the building. The three main categories of costs incorporated into net leases include: maintenance, insurance, and taxes. There are 3 types of net leases associated with a different allocation of payment for expenses.
Single Net Lease:
The tenant is responsible for paying property taxes in addition to rent. Taxes associated with the property are passed onto the tenant instead of the landlord; however, the landlord is still responsible for the operating expenses incurred. This type is less common, as the other types of net leases pass more costs onto the Tenant.
Double Net Lease:
The tenant is responsible for paying rent plus property taxes and insurance. The landlord is still responsible for maintenance expenses.
Triple Net Lease:
The name comes from the three expense categories the tenant is responsible to pay beyond the rental amount: property taxes, insurance, and maintenance. The tenant is responsible for all expenses and costs associated with the space.
If you have any further questions on the various lease types for office space, you can contact our firm. We can break down exactly what type of lease you have, what you are paying for, what you should be, and what lease options are best for the growing needs of your business.