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Types Of Commercial Real Estate Leases

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Posted September 23, 2010 and Updated September 23, 2010 by Eric Hughes #

In my 19 years of commercial real estate leasing, both in warehouse and office, I have seen hundreds of lease documents with many arrangements of rent and responsibilities. The basic and most used leases are as follows.

NNN or Triple Net Lease 

NNN leases put the responsibility of operating expenses solely on the shoulders of the Tenant. In some “true” NNN leases repairs to the roof, walls and foundations may also be the responsibility of the Tenant. This lease type is very popular with investors as the return on equity is easy to compute and the investment requires little to no management since the Tenant takes care of everything.

Net Lease 

Similar to a NNN Lease, however the base rent usually covers either taxes and insurance with the Common Area Maintenance (“CAM”) being the responsibility of the Tenant.

Gross Lease 

This type lease is prevalent in multi tenant office and industrial buildings. The rental rate usually covers the Taxes, Insurance and CAM. There will usually be a provision for the landlord to pass thru his increase in expenses beyond either a Base Year expense “benchmark” or an Expense Stop where the landlord’s expense burden is defined as an annual amount.

Modified Gross Lease 

Similar to a Gross Lease except that the Landlord will pass thru one or more expenses to the tenant, usually property insurance.

Percentage Rent 

Usually used in retail applications, this lease type may establish a minimal base rent with an additional payment calculated as a % of the Tenants gross sales. These leases generally require quarterly accounting reporting and can be a management headache for both Tenant and Landlord.

Expense Caps 

An experienced broker can help you obtain limits on exposure related to the Landlord’s controllable expenses (i.e. CAM, Management, etc). Without modification, most Landlord leases allow a landlord to pass thru capital improvements to the property regardless of its cost or necessity. Tenants beware!

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