Commercial Lease Types

Almost every aspect of a lease is negotiable and terminology varies from market to market.  Here are a few of the most widely used lease types: 

Gross Lease:                 Also called the "Full Service Gross Lease" where the Landlord pays all of the operating expenses of the building (property taxes, insurance, common area maintenance, janitorial, etc.) for the duration of the term.  In the Southern California market, this is the most popular type of lease for Class A office buildings.

Modified Gross Lease:  Also referred to as an "Industrial Gross Lease", the Modified Gross Lease requires that the Landlord pay for one or more of the operating expenses. 

Example:     Commercial Agent Dan markets his client’s 1,500 square foot light manufacturing space at $0.95 per square foot industrial gross where the tenant pays for his/her own trash services and electricity.  The landlord will pay for all property taxes, insurance, common area maintenance and municipal water.

There is no standard for which expenses are the Landlord’s responsibility.  Landlord and Tenant can agree as to who pays for what.

Net Lease:                     In addition to rent, the Tenant pays for their pro rata share of operating expenses including property taxes, insurance and common area maintenance.  In most cases, the Landlord is responsible for the roof, parking lot and possibly the foundation.

Triple Net Lease:           Also known as a “NNN Absolute” lease, the Tenant is not only responsible for the operating expenses as in a Net Lease, he or she is obligated to pay for all repairs to the property.  The Landlord simply collects rent which, unlike a Gross Lease, represents the Landlord’s net operating income.  Net leases are very popular with single tenant retail and industrial users.

Percentage Lease:        Also known as an “Overage Lease”, the Percentage Lease is additional rent due to the Landlord beyond just the base rent.  The extra rent is based on sales over a specified amount, called the breakpoint.  This type of lease used almost exclusively in a retail setting of large shopping centers and malls.  It is beneficial to both Tenant and Landlord because the Landlord has a financial stake in the success of his or her tenants which encourages owners to maintain the property and wisely choose a complementary mix of tenants.

Indexed Lease:             This lease ties the payments to a specified financial index such as the Consumer Price Index (CPI).

Step Lease:                   The Step Lease may increase the rent due by a preset amount or on a percentage basis.  It may also address operating expenses such increases in operations, utilities and taxes.

Sublease:                      Subletting occurs when the Tenant transfers all of his or her right in the property to someone else.  The original Tenant retains a financial obligation to pay the rent but becomes a Sub-Landlord to the Subtenant.