When it comes to leasing real estate, it is important to know the basics about the different types of leases available. Leases vary from situation to situation depending on the type of real estate that is up for lease. A lease for a housing unit could be very different from that utilized for office space. It can seem daunting when you initially attempt to understand the numerous real estate leases available but it does not have to be. Simply put, real estate leases break down into three categories.
1. Gross Lease
The most popularly utilized lease when it comes to housing rentals as well as some commercial rentals is the Gross Lease (aka full service lease) which is all-inclusive. These leases are considered tenant friendly since the landlord handles the operational expenses of the property. Such expenses usually include taxes, insurance and maintenance. Any increases in the operational expenses of the property would not be passed onto the tenant during their lease. A Gross Lease would be ideal for tenants looking for a stable lease with no surprises. If any increases in rent were to occur, it would only happen at the end of the lease and tenants would be given notice ahead of time.
2. Net Lease
The opposite of a gross lease is a Net Lease. Net Leases are considered more landlord friendly. Within the monthly rent, a tenant pays a fixed base amount as well as an adjustable amount. The tenant is charged a lower base amount which leaves room for the tenant to pay a share of the operational costs of the property. This often includes the taxes, insurance and maintenance. Net Leases are used more for commercial spaces. Under the umbrella of net leases are several different types including single net lease, double net lease, triple net lease and absolute triple net lease. Single net leases are where tenants pay a share of the building’s property taxes, utilities and janitorial expenses on top of their base rent while the landlord covers all other expenses. While no one wants to see any increases, tenants face rent increases just as landlords face increases in expenses. With double net leases, in addition to the previously mentioned expenses, tenants pay a share of the property insurance. For triple net leases, tenants pay a share of basically all the expenses including the structural repairs and common area maintenance expenses. Probably the riskiest and most rare net lease, absolute triple net leases put tenants in a position where they take care of virtually every expense and responsibility dealing with the building they are renting.
3. Modified Gross Lease
For those not completely sold on gross or net leases alone, this is the type of lease for you. Modified Gross Lease (also called modified net leases) are the perfect combination of gross and net leases. These leases mash together the ease of a lump sum that gross leases offer and the flexibility of expenses offered by that of net leases, leaving a compromise between the two and allowing both tenants and landlords to be satisfied. Tenants are expected to pay for janitorial services and utilities outside of rent but are able to negotiate with the landlord which nets will be covered in the base rent. Lease rates do not surprisingly increase for Modified Gross Leases if the taxes, common area maintenance or taxes increase. On the other hand, if such expenses decrease, the landlord receives the excess funds. The key to Modified Gross Leases is flexibility; giving a customizable and mix-and-match feel that allows tenants to feel confident in their lease.
Miscellaneous Leases
Beyond the gross, net and modified leases, there are a few other leases available for tenants. Flat or fixed leases allow for a set rent for a defined period of time that is paid once. With step leases, increases in rent are expected over a certain amount of time in order to cover an estimated increase in expenses on the landlords’ side. A cost-of-living lease is based on just that, the cost of living and tends to vary greatly depending on the economy. With percentage leases, depending on which ends up being higher, tenants are expected to pay both a base rent and percentage of gross income or one or the other.
As you can see, leases vary widely. It is best to contact a real estate attorney when writing a commercial lease or prior to signing one.