Understanding Commercial Lease Types and Responsibilities

Over three decades of commercial real estate leasing experience in warehouse and office markets, we’ve encountered numerous lease arrangements and responsibilities. This article aims to provide a comprehensive overview of the most common lease types and their implications for tenants and landlords. By understanding the fundamentals of each lease type, you can make more informed decisions when negotiating your commercial lease terms.

Article Outline

• NNN Lease
• Net Lease
• Industrial Gross Lease
• Modified Gross Lease
• Percentage Rent
• Expense Caps
• Common Area Maintenance (CAM)
• Summary
• Call to Action

NNN Lease

Triple Net (NNN) leases place the responsibility of operating expenses solely on the tenant. In some “true” NNN leases, repairs to the roof, walls, and foundations might also be the tenant’s responsibility. Investors favor this lease type due to the ease of computing return on equity and minimal property management requirements. For more information on NNN leases, refer to our article on Triple Net (NNN) Types of Commercial Leases – Part 2.

Net Lease

Net leases are similar to NNN leases. However, the base rent typically covers taxes and insurance, with the tenant being responsible for Common Area Maintenance (CAM). Learn more about Net leases in our article on Net Lease – Types of Commercial Leases – Part 4.

Industrial Gross Lease

Industrial Gross leases are prevalent in multi-tenant office and industrial buildings. The rental rate usually covers taxes, insurance, and CAM. The landlord typically includes a provision for passing through expense increases beyond a Base Year expense “benchmark” or an Expense Stop, which defines the landlord’s expense burden as an annual amount. For more information on Industrial Gross leases, see our article on Industrial Gross Lease – Types of Commercial Leases – Part 1.

Modified Gross Lease

Modified Gross leases are similar to Gross leases, but the landlord passes through one or more expenses to the tenant, usually property insurance. For more details on Modified Gross leases, refer to our article on Modified Gross - Types of Commercial Leases - Part 5.

Percentage Rent

Percentage Rent leases are typically used in retail applications. This lease type may establish a minimal base rent with an additional payment calculated as a percentage of the tenant’s 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 the landlord to pass through capital improvements to the property regardless of cost or necessity. Tenants beware! For more details on Expense Caps, check out our article on Expense Caps - Commercial Lease Terminology - Part 1.

Common Area Maintenance (CAM)

Common Area Maintenance (CAM) refers to items that are part of a multi-tenant property for shared use by all tenants. This might include lawns, landscaping, atriums, parking areas, cafeterias, break areas, restrooms, etc. In a multi-tenant property, you should expect to participate in the expenses associated with these common areas. For more information on CAM, read our article on Common Area Maintenance (CAM) - Commercial Lease Terminology - Part 2.

Summary

Each commercial lease type has its unique characteristics and implications for tenants and landlords. Carefully analyzing each lease and understanding the division of responsibilities and expenses is crucial for making informed decisions. For a more comprehensive guide on entering a commercial lease agreement, refer to our article on Mastering Commercial Lease Renewal: Expert Tips for Office and Industrial Tenants.

Call to Action

If you are looking for a warehouse, office, or other space in Houston or elsewhere, or if you need to renew your lease, Warehouse Finder can help. Contact us using our Get Started link, call us at the phone number on this page in the upper right, or chat with us using our chat widget on the page in the lower right. Let our expertise guide you through the complexities of commercial leasing and help you protect your interests.