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Commercial Real Estate Leases: What Landlords Need To Know

April 06, 2018

Commercial Real Estate Leases: What Landlords Need To Know
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As a landlord, safeguarding your personal and financial assets goes beyond just securing occupants. Yes, you want (and need) to fill your commercial real estate building with paying tenants. However, you also want to ensure you’re optimizing value with every renter as well as protecting your interests. The key to a successful landlord/tenant relationship often begins with one critical component: the lease.

Which Commercial Real Estate Lease Makes Sense For Your Property?

Many lessors are surprised to learn that not all commercial real estate leases are created alike. There are several rental contract models available to suit property type as well as situational details. Which one (or ones) makes most sense for your property? Go into the process armed with the essential facts about different commercial real estate leases to make the best choice for your building.

Percentage Lease

This contract is most commonly used in retail stores and malls. Each month, your tenants pay a base rate plus a pre-determined percentage of their sales. Put simply: as they grow, you make more money. Including upgrade items like lighted signs and other sought-after amenities into your agreement can work to your long-term advantage. Also, if your commercial space is in a high-traffic area, a percentage lease can be a great way to boost your profits without additional investment.

Net Lease

Commercial buildings have periphery expenses beyond the space itself (a fact you already know all too well). With a net lease, your tenants pay some or all of the taxes, maintenance, or insurance expenditures. All additional expenses are negotiated in advance and included as part of the lease agreement. Since your costs change every year, it’s a good idea to review net leases on an annual basis. Net leases can be used in any commercial situation and are particularly beneficial when your operating costs are higher than average or more than initially expected.

Double Net Lease

At its core, this contract follows the same concept as a single net lease. However, instead of being an either/or situation, the double net lease tenant pays rent plus the cost of taxes and insurance. Again, this can be used for any commercial property, but it’s still a good idea to review it annually to protect your profits. Depending on the type of building and location, this can be an ideal way to pass along some of the operating expenses to your tenants.

Triple Net Lease

You guessed it! A triple net lease adds maintenance costs to the rates included in a double net contract. Any net lease is typically to your benefit minimizes the costs you’re ultimately responsible for paying. A net lease’s extensive versatility allows its use in virtually any commercial situation, making them a popular industry standard. Tenants also appreciate seeing the costs of each item and having a clear understanding of their monthly rent expenses.

Fully Serviced Lease or Gross Lease

A fully serviced lease, also known as a gross lease, is typically used in office spaces as well as some industrial and retail spaces. It’s best used for buildings with a lot of public areas that are shared with all tenants. With this type of lease you, as the landlord, pay all usual costs associated with owning these building. These costs are then passed along to the tenant using a “load factor,” which is calculated by combining usable square feet with a percentage of the square feet of common areas used by all tenants.

Some of your common areas may include:

  • Restrooms
  • Lobbies
  • Stairways
  • Elevators
  • Hallways
  • Parking areas

Based on this premise, if you have a building with four tenants and each usable space (space only used by the tenant) is about equal, each tenant pays about 25% of the cost for maintaining common areas to uphold their portion of the gross lease.

Double Check The Details For Ultimate Contract Success

Before entering into any commercial real estate lease, be sure you’re using the proper contract model, both for your building and for the intended use. Remember, agreements can be situational; it’s possible to have different tenants in the same building with different lease types based on how they’re using the space. For example, a building may have both office and industrial/manufacturing space. Tenants using their rental area only for office space may fall into a net lease while the industrial tenants may sign a fully serviced lease. Remaining agile with your contract agreements can ensure you’re consistently maximizing benefits and revenues at all times.

Still have questions about which type of lease to use for your business property? We can help. Contact Southpace Properties to consult with one of our skilled and licensed commercial realtors today.


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