Types of Commercial Leases

A commercial lease is a legally binding agreement between a landlord and a “business” tenant for the rental of commercial property. Unlike residential leases, which are typically used for renting homes and apartments, commercial leases are used for renting spaces intended for business purposes, such as churches, offices, retail stores, warehouses, or industrial facilities.

Commercial leases can vary widely in terms of complexity and terms, depending on factors such as the type of property, location, market conditions, and negotiating leverage of the parties involved. It’s essential for both landlords and tenants to carefully review and negotiate the terms of the lease to protect their interests and ensure a mutually beneficial arrangement.

Triple-Net Lease:
Often abbreviated as NNN lease, is a type of lease agreement commonly used in commercial real estate. In a triple net lease, the tenant agrees to pay for all operating expenses associated with the property, including property taxes, insurance, and maintenance costs, in addition to the base rent.

The “triple net” refers to the three main expenses the tenant is responsible for:

  1. Property Taxes: The tenant pays their share of property taxes based on the proportion of the leased space they occupy.
  2. Insurance: The tenant typically pays for their share of insurance premiums, which may include property and liability insurance.
  3. Maintenance: The tenant is responsible for maintenance costs, including repairs and upkeep of the property, such as landscaping, utilities, and janitorial services.

Triple net leases are often favored by landlords because they shift a significant portion of the operating expenses and risks associated with property ownership to the tenant. For tenants, triple net leases provide more control over the property and can offer lower base rental rates compared to other lease structures, but they also carry the risk of unexpected expenses.

These leases are common in commercial real estate, particularly for properties leased to national retail chains, pharmacies, banks, and other large tenants.

Gross Lease:
Sometimes referred to as a Full-Service Lease is an agreement where the landlord is responsible for paying most, if not all, of the property’s operating expenses. This typically includes property taxes, insurance, and maintenance. The tenant pays a single, fixed rental amount, simplifying their financial planning as they don’t have to worry about fluctuating expenses associated with the property.

Modified Gross Lease:
A middle ground that combines elements of both gross leases and net leases where the landlord and tenant share certain operating expenses, allowing for greater flexibility in how costs are allocated.

In this instance, the tenant pays a base rent amount, and specific operating expenses are divided between the landlord and tenant as per the lease agreement. Terms can be negotiated to fit the specific needs and capabilities of both parties. For example, a tenant might agree to pay for their own utilities and janitorial services, while the landlord covers property taxes and major repairs.

A modified gross lease offers a balanced approach, providing tenants with some cost predictability and landlords with the ability to share the burden of property expenses. The flexibility of this lease type makes it a popular choice for various commercial properties.

Percentage Lease:
Although more common in the retail setting than that of a church, a Percentage Lease is when the tenant pays a base rent plus a percentage of their gross sales. This is a collaborative arrangement that benefits both landlords and tenants by tying rent to business performance. Properly structured, it can create a win-win situation where both parties are incentivized to maximize the commercial success of the property.

Ground Lease:
Usually, a long-term lease agreement in which a tenant is allowed to develop a piece of property during the lease period. Unless otherwise negotiated, the tenant is often responsible for developing and maintaining the property, including constructing buildings and other structures. At the end of the lease term, ownership of the land and all improvements made by the tenant revert to the landowner unless an extension or renewal is negotiated.

Please see our other related articles

Church Evictions
Churches and For-Profit Tenants
Churches and Unrelated Business Income Tax
Churches and Property Tax Exemptions

Disclaimer: Every situation is different and particular facts may vary thereby changing or altering a possible course of action or conclusion. The information contained herein is intended to be general in nature as laws vary between federal, state, counties, and municipalities and therefore may not apply to any given matter. This information is not intended to be legal advice or relied upon as a legal opinion, course of action, accounting, tax, or other professional services. You should consult the proper legal or professional advisor knowledgeable in the area that pertains to your particular situation.

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