When it comes to leasing industrial real estate, understanding the different types of commercial leases is crucial. These leases outline the rental obligations between the landlord and tenant and can significantly impact the financial responsibilities of each party. In this article, we will explore the various types of commercial leases in industrial real estate, including gross leases, modified gross leases, net leases, and absolute leases.
1. Gross Lease
A gross lease, also known as a full-service lease, is a type of lease where the tenant is responsible for paying the base rent only. Under a gross lease, the landlord covers all operating expenses, including taxes, insurance, and maintenance fees. This type of lease is favorable for tenants as they have a predictable rental cost and do not need to worry about additional expenses. Gross leases are commonly used in industrial real estate for tenants who want to avoid the complexities of managing property-related expenses.
2. Modified Gross Lease
A modified gross lease, sometimes referred to as a double net lease, strikes a balance between a gross lease and a net lease. In a modified gross lease, the tenant pays the base rent, utilities, and a portion of the operating costs. The specific details of the lease can vary, but typically the tenant pays a pro-rata share of the building’s operating expenses based on their occupancy percentage. Modified gross leases are flexible and offer a middle ground for both the landlord and tenant to share certain expenses.
3. Net Lease
Net leases are common in industrial real estate and shift the burden of operating expenses from the landlord to the tenant. Under a net lease, the tenant pays the base rent plus a portion or all of the property’s operating expenses, including taxes, insurance, and maintenance fees. There are three primary types of net leases: single net lease, double net lease, and triple net lease.
- SINGLE NET LEASE: IN A SINGLE NET LEASE, THE TENANT PAYS THE BASE RENT AND PROPERTY TAXES, WHILE THE LANDLORD COVERS OTHER OPERATING EXPENSES SUCH AS INSURANCE AND MAINTENANCE.
- DOUBLE NET LEASE: A DOUBLE NET LEASE REQUIRES THE TENANT TO PAY THE BASE RENT, PROPERTY TAXES, AND INSURANCE, WHILE THE LANDLORD IS RESPONSIBLE FOR MAINTENANCE COSTS.
- TRIPLE NET LEASE: UNDER A TRIPLE NET LEASE, THE TENANT BEARS THE RESPONSIBILITY FOR THE BASE RENT, PROPERTY TAXES, INSURANCE, AND MAINTENANCE COSTS. THIS TYPE OF LEASE OFFERS THE LANDLORD THE LEAST FINANCIAL RESPONSIBILITY, MAKING IT POPULAR FOR LONG-TERM LEASES WITH CREDITWORTHY TENANTS.
4. Absolute Lease
An absolute lease, also known as an absolute triple net lease, is a lease where the tenant assumes all building expenses, including taxes, insurance, and maintenance costs. Unlike other net leases where the tenant reimburses the landlord for these expenses, in an absolute lease, the tenant directly pays for all costs associated with the property. Absolute leases are typically long-term agreements and are more commonly seen with national or regional tenants with excellent credit.
Negotiating Commercial Leases
When entering into a commercial lease, it is essential to negotiate the terms and understand the financial responsibilities involved. Here are some key negotiation tips to consider:
- REVIEW THE LEASE CAREFULLY: READ THROUGH THE LEASE AGREEMENT THOROUGHLY AND CLARIFY ANY AMBIGUITIES OR AREAS OF CONCERN WITH THE LANDLORD OR LEGAL COUNSEL.
- UNDERSTAND OPERATING EXPENSES: DETERMINE WHICH OPERATING EXPENSES ARE THE RESPONSIBILITY OF THE TENANT AND WHICH ONES ARE COVERED BY THE LANDLORD. THIS INCLUDES TAXES, INSURANCE, MAINTENANCE, AND ANY OTHER ADDITIONAL COSTS.
- CONSIDER LEASE TERM: EVALUATE THE LENGTH OF THE LEASE TERM AND WHETHER IT ALIGNS WITH YOUR BUSINESS NEEDS. LONGER-TERM LEASES MAY OFFER MORE STABILITY BUT COULD ALSO LIMIT FLEXIBILITY.
- SEEK PROFESSIONAL ADVICE: CONSULT WITH A TENANT BROKER OR COMMERCIAL REAL ESTATE ADVISOR TO HELP NAVIGATE THE NEGOTIATION PROCESS AND ENSURE YOU ARE GETTING THE BEST TERMS POSSIBLE.
Remember, every lease is negotiable, and it is crucial to advocate for your best interests as a tenant.
Commercial Lease Type Chart
To summarize the different types of commercial leases in industrial real estate, refer to the following chart:
| Lease Type | Tenant Pays | Landlord Pays | Key Features | Typical Usage |
| Gross Lease | Base rent | Operating expenses (including taxes, insurance, and maintenance) | Tenant pays only the base rent | Industrial real estate, simplified costs |
| Modified Gross | Base rent, utilities, portion of operating costs | Remaining operating costs | Middle ground between gross and net leases | Industrial real estate, shared expenses |
| Net Lease | Base rent, portion or all of operating expenses (depending on the type: single, double, or triple) | Varies (partial or no responsibility for operating expenses) | Shifts operating expenses to the tenant, with different levels of responsibility based on the lease type | Industrial real estate, shared expenses |
| Absolute Lease | Base rent, all building expenses | Nothing | Tenant assumes all building expenses, including taxes, insurance, and maintenance | Long-term leases, creditworthy tenants |
Conclusion
Understanding the different types of commercial leases in industrial real estate is essential for both landlords and tenants. Each lease type has its advantages and considerations, and it is crucial to carefully review and negotiate the terms to ensure a fair and beneficial agreement. Whether opting for a gross lease, modified gross lease, net lease, or absolute lease, it is important to seek professional advice and thoroughly understand the financial responsibilities and obligations outlined in the lease contract.
