Five Types of Commercial Leases
Types of Commercial Real Estate Leases You Should Know
There are five types of commercial leases – Gross, Graduated, Net, Percentage, and Ground.
What is a Gross Lease in Real Estate?
Gross leases are also called Fixed leases, Flat leases, or Straight leases. Under a gross lease, the tenant pays a set amount of rent and the landlord pays all additional expenses. These expenses may include maintenance, repairs, taxes, special assessments, and insurance. Under a Gross lease, tenants typically pay for utilities such as water and electricity.
What is a Graduated Lease in Real Estate?
Graduated leases are similar to Gross leases, but they include periodic rent increases. They’re occasionally used for residential properties, but more common for commercial properties. Specific dates are usually set for the increases, and those increases are frequently based on the cost-of-living index. Most commercial leases have a graduate component to them including Gross Leases, Net Leases and Ground Leases.
What is a Net Lease in Real Estate?
Net leases have tenants paying rent, maintenance, and operating expenses such as taxes, utilities, repairs, and insurance. It’s called a Net lease because the landlord “nets” more of the rental income by shifting costs to the tenant. There are three types of Net leases, Net, Net-net, and Net-net-net, which is also referred to as a Triple Net lease. In a Net lease, the tenant pays for some of the operating expenses and building maintenance. In a Net-net lease, the tenant pays some maintenance and operating expenses, insurance premiums, and property taxes. In a Triple Net lease, the tenant pays insurance premiums and taxes. They are also responsible for operating expenses, such as utilities and repairs.
What is a Percentage Lease in Real Estate?
Percentage leases have rent based on a percentage of the monthly or annual gross sales of the tenant. This type of lease is especially common in retail. Under a pure Percentage lease, the amount of rent due is a percentage of the tenant’s gross sales. However, most commonly in Percentage leases, the landlord receives a base rent, which is a fixed amount, and a percentage of the tenant’s gross sales in addition to that base rent. The percentage amount varies greatly depending on the type of business involved.
What is a Ground Lease in Real Estate?
In a Ground lease, which is common in metropolitan areas, the landlord rents vacant land to a tenant who wants to build on the property. This lease tends to be long-term due to the amount of time it takes to construct a building and make it profitable. In this category, a sandwich lease is common. A sandwich lease occurs when a tenant builds a property on the land, then rents that property. The tenant is a tenant to the land and a landlord to the building.
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