We all know what leases are–legal contracts by which the landlord conveys a property (real estate or equipment) to the tenant for a predetermined time frame. The tenant makes periodic payments to the landlord in exchange of right to use the property for the specified period of time. When it comes to commercial real estate leases such as office and retail, the leases can be classified into different types based on how they treat various expenses. This blog offers a quick overview of three main types of leases-namely, the triple net lease, modified gross lease and gross or full-service lease.
Net leases
Net leases are lease agreements where the tenant pays the rent and their share of other common expenses including utilities, taxes or insurance. Net leases can be further classified into single net, double let and triple net leases.
A single net lease
In case of a single net lease, the tenant pays their rent and their share of one of real estate taxes.
Double net lease
In a double net lease, the tenant pays their rent and their share of real estate taxes and insurance premium related to the premises.
A triple net lease
A triple net lease is also often referred to as NNN or 3N or sometimes, even simply as a net lease. In a net lease, the tenant pays the landlord only the rental fee and all other property-related expenses such as utilities, taxes, insurance are are borne by the tenant. Triple net leases usually work well when the lease term is 10 years or more.
A gross lease
A gross lease is just the opposite of a triple net lease. As the name suggests, in the case of a gross lease agreement, the tenant pays a lumpsum amount towards rent to the landlord and then it is the landlord’s responsibility to take care of all other expenses such as taxes, insurance and utilities.
A modified gross lease
A modified gross lease is, in a way, a mix of both, the net and gross lease concept. In a modified gross lease, the tenant pays the rent as stipulated in the lease to the landlord and also their pro-rata share of real estate taxes, insurance, utilities and other operating expenses.
What kind of lease is the best?
Each of these leases have their own benefits, for both, the landlord and the tenant. So, without any context, it is not possible to pick the best lease type out of these. For example,
In case of net leases, it is beneficial to the tenants in the sense that their base rent is considerably lower than a gross lease. However, it works well only if the property is well-maintained and has high occupancy rates, that push down the tenant’s prorata share of common area charges. In a low-occupancy or poorly maintained property, a net lease may not be beneficial to the tenant. Plus, there’s the hassle of CAM reconciliations and audits that the tenant has to conduct every year to ensure they have not been overcharged by the landlord.
On the other hand, while a gross lease spares the tenant the hassle of paying for common expenses separately and CAM reconciliations and audits to ensure they were invoiced accurately by the landlord. But, overall, gross leases tend to work out more expensive than modified gross and net leases.
A modified gross lease has its share of benefits too. It is best suited for leases whose tenure is less than 10 years. As the tenant pays some share of their common property expenses, their overall rental costs tend to remain lesser in comparison to a gross lease.