Commercial Real Estate Lease Types

Finding a landlord and tenant match in commercial real estate requires a commercial real estate lease type that benefits both. The needs of the landlord are income from rent and the control of costs to assure a profit. The tenant wants to peg their rental costs as closely as possible also. Using the right type of lease, they can both satisfy their needs with a bit of negotiation at times.

In comparison, residential leases are simpler.  The tenant usually pays their rent and their own utilities exclusive of sewer and maybe water/trash.  In commercial leases there are many more considerations that are important to either the tenant, the landlord or both.  The type of lease is often determined by the type of tenant business:

  • Retail:  The retail business can have seasonal or other factors that make sales vary quite a bit over the course of a year.  Just ask a Christmas store owner.  They don't make nearly as much money in July as they do in November.  In this type of business, the tenant would prefer low lease payments in slow months and higher rents when the money is flowing.  That's the Percentage Lease below.
  • Offices with Steady Business Flow:  The Gross Lease fits here, as an attorney, consultant or accountant pretty much want to pay like a residential lease.  There's a fixed monthly amount and possibly utilities, but none of the other expenses of building maintenance or operation are the responsibility of the tenant.
  • Manufacturing, Industrial or Machine Intensive:  From auto repair shops to a major manufacturing plant, some businesses are heavy utility users, and they also can tend to be harder on the structure and facilities, requiring more maintenance and repairs.  The landlord in these cases will prefer a triple net lease as described below.  If the tenant balks, then possibly they can agree on a modified net lease.

1
The Gross Lease

Man Signing a Contract
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The gross lease in commercial real estate is sometimes described separately from the full service lease. However, the difference is not great, and most people consider them together. Learn how they are the same, the difference and how the gross commercial lease differs from other commercial real estate lease types. More

2
The Triple Net Lease

person handing key to another in front of building
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The triple net lease in commercial real estate requires that the tenant pay a significant share of expenses of operation, as well as all taxes and insurance related to their rental unit. This type of lease helps the landlord by fixing their costs, as their rents are fixed. Tenants aren't fond of this type of lease especially in older properties. More

3
The Modified Net Lease

office buildings and skyscrapers
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As a compromise between the gross lease and the triple net, the modified net lease is quite helpful in helping landlords and tenants to structure lease terms that work for both. This article gives the details of how they differ from the other lease types. More

4
The Percentage Lease

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 A Percentage Lease is a lease that typically requires a tenant pay "Base Rent" and then on top of that amount pay a percentage based on monthly sales volumes. Percentage leases are commonly executed in retail mall outlets but depending upon the location and nature of the business can have a dramatic impact on percentage rent. More

If You Want to Practice in Commercial, Know these Well

When a residential real estate agent sees the fat commissions involved with commercial real estate transactions, the lure is strong. Why not move over to commercial and enjoy the high life? I agree that I'd rather be getting high five and six figure commissions rather than the average residential check. But, it's not a cake walk getting there. Often a commercial deal can take many months or more than a year to get from initial interest to the closing table. For the new agent, we then need to add sometimes a year or more before they actually build a sphere of influence that will get them a buyer or seller client. So, if you have an interest in commercial real estate, by all means see if you can live the dream. But, put a plan together to make personal expenses when you may not see a commission for a while.