If you are new to exploring real estate, or just interested in learning more about leasing and the different types that exist, keep reading to explore all the possible leases you could encounter.
What is a lease?
A lease is an implied or written agreement that lays out the conditions under which a lessor lets out a property for the use of the lessee. This agreement specifies the length of time the lessee may use the property and in exchange for the promise to utilize the space, the owner is promised consistent pay over the agreed-upon period of time.
There are many different types of leases, but some are far more common than others. We will go into details about these popular types of leases so you become familiar when you encounter them. The structure of a lease is influenced by current market trends and preference of the lessor. Depending on the lease type, the burden can fall on either participant to pay things such as utilities, maintenance, and operating expenses. This is why it is paramount to understand what type of lease you are getting involved with before you sign away.
Here are the most common types of tenancy agreements that you are most likely to encounter:
1. Full Service/Gross Lease
If you sign this type of lease, you are responsible for paying base rent. The landlord is responsible for building expenses (maintenance fees, insurance, and real estate taxes). There are a few things the owner does not cover such as data and phone. The monthly rate in this type of lease is often higher. These are common in large multi-tenant units, office buildings.
This type of lease is good for tenants because there aren’t any extra costs besides the normal, monthly rate. The disadvantage is that owners can charge a premium to cover the cost of the tenancy.
2. Net Lease
This type of lease means tenants pay a portion of all the buildings operating expenses including maintenance fees, real estate taxes, and insurance. There are different types of net leases which we will outline below.
a. Triple Net Lease
Triple net lease is the opposite of a gross lease. The tenant pays for rent and utilities as well as the property’s operating expenses, including maintenance fees, building insurance, and property taxes. The tenant has the ability to exert control over landscaping and exterior maintenance. This type of lease is mostly used for the retail type of properties.
b. Double Net Lease
In this type of lease, the tenant pays for rent, utilities, property taxes, and building insurance. The landlord is responsible for the building’s structural maintenance expenses.
c. Single Net Lease
In this agreement, tenants pay for rent, utilities, and property taxes while the landlord is responsible for building insurance and maintenance expenses.
d. Absolute NNN Lease
Not to be confused with triple net leases where tenants pay for some or all of building repair expenses with occasional help from the landlord, in absolute NNN leases, the landlord has zero responsibility for the building. The burden falls on the tenant for all building expenses. This could mean any maintenance required, repairs needed for the roof or the building’s structure. This lease is rarer than others and often found in single-tenant systems, where the owner builds units to fit around the needs of a tenant. Usually, the tenants are large businesses that have the ability to maintain this responsibility.
3. Modified Gross Lease
This type of lease is somewhere between a gross lease and a triple net lease. The tenant pays base rent, utilities, and part of the operating costs. The details that determine exactly what portion of operating costs the lessee pays is highly variable depending on the specific contract.
4. Percentage Lease
This type of lease requires tenants to pay base rent plus a portion of business sales. This portion is typically around seven per cent and proceed with caution if your landlord asks for much more than that. This type of lease is commonly found with retail mall outlets. The lessee could find this arrangement attractive, as it lowers its fixed cost, and the lessor obtains some upside potential beyond what a standard lease could produce.
Example: XYZ food leases space in a shopping center and pays $3,000 a month ($36,000 a year) and also subject to percentage rent of 6%, with a natural breakpoint.
The natural breakpoint is the point where the base rent equals the percentage rent. To calculate it, divide the base rent by the percentage. In this case: $36,000 ÷ 6% = $600,000. When XYZ Food’s sales exceed $600,000, it must pay the landlord 6% of every dollar it brings in above the breakeven point. Let’s say its sales are $700,000, then in addition to $36,000, XYZ Food will pay $6,000 = ($700,000-$600,000)*0.06.
These are the major types of leases you may encounter and some basic rules about them, but these rules are not absolute. There are benefits and drawbacks to each depending on your needs. Every contract is unique and negotiable, so ensure to read carefully and review with your attorney before signing.
If you have any further question and need help negotiating a lease contract, do not hesitate to reach out to us https://www.denizsenyurt.com/contact/