Commercial Real Estate: Getting the Right Lease Type
Getting a supreme deal on your next commercial real estate lease can largely depend on the type of lease you get. Commercial real estate leases come in three basic types: gross, net and modified gross lease. Gross and net refer to two different ways your rent can be calculated.
This lease typically involves the tenant paying one large sum for his rent, with the landlord using funds from the sum to cover all expenses. Expenses can include building property taxes and insurance, utilities, janitorial services, lobby and other maintenance that needs to be regularly completed. Individual property taxes and business insurance are still the responsibility of the tenant.
A major advantage for the tenant is being able to accurately calculate expenses associated with the property, as many are already covered by the rent. Make sure you get the details on exactly what’s covered, such as the frequency of janitorial services and other ongoing maintenance.
The net lease has a lower base rent for the tenant, but it also requires the tenant to pay some or all of the “usual costs.” Usual costs refer to costs related to maintenance, operations and building use and other fees. These include taxes, insurance and common area maintenance (CAM) items such as janitorial services, sewer fees, trash collection, water, parking lots, landscaping, fire sprinklers and other services or areas commonly shared throughout the building.
Net leases come in several variations, with rent amounts adjusted based on what it covers in terms of CAMs, building expenses, structural repairs and other usual costs and fees. Net leases are typically more advantageous for the landlord.
Modified Gross Lease
Also called a modified net lease, the modified gross lease is a happy medium between the gross and net leases. Here the rent is still paid in one lump sum, but landlords and tenants negotiate which other items are covered. This lease can be the most advantageous to both parties, as each can negotiate for terms that work out best in the long run.
Regardless of what type of lease you get, make sure you understand – and agree with – all the terms. An experienced commercial real estate agent is an ideal ally to have by your side.