Understanding Commercial Leasing

A net lease is an agreement in which the tenant covers rent and other costs, such as property taxes, utilities, maintenance, and others. Net leases can be broken down further into the following subsets:

• Single net lease: The cheapest of the net leasing options, a single net lease requires the tenant to pay the base rent and the property taxes. The landlord will be responsible for other expenses like property insurance and maintenance costs.
• Double net lease: More costly than the single net lease, the double net lease requires the tenant to pay rent, property taxes, and another major expense, like property insurance or maintenance fees.
• Triple net lease: With a triple net lease, the tenant is responsible for rent as well as nearly all other expenses, such as property taxes, property insurance, maintenance, utilities, and repairs. While this option is more costly and riskier for the tenant, it allows the business owner more freedom and control over maintaining the space, ordering repairs, and updating the building when necessary.
• Absolute net lease: An absolute net lease, sometimes called a bondable net lease, is just like a triple net lease except that the tenant is also responsible for all property costs, including major repairs. So, if there is a fire, tornado, hurricane, flood, or other extreme event causing significant damage, the tenant must cover the costs, in addition to the rent, taxes, insurance, and everything else.

Net leases are the most common type of commercial lease business owners encounter.

A gross lease is an agreement in which the tenant pays the rent, and the landlord covers the costs for taxes, insurance, utilities, and other related expenses. Like net leasing, gross leases can be broken down into sub-versions:

• Full-service lease: A full-service lease requires the tenant to pay rent while the landlord pays for all other expenses—insurance, taxes, utilities, maintenance, minor and major repairs, and other costs. A full-service lease is cost-effective, but it can limit your control over the property.
• Modified lease: A modified lease is an agreement in which the tenant and the landlord work out which expenses each will cover. Tenants can request to pay for maintenance and repairs, offering more control over the physical space, while landlords benefit from a more balanced agreement.

A percentage lease is a type of commercial lease where the tenant pays the property owner a certain amount for the rent in addition to a percentage of the business's gross income. While the rent is typically lower than a net or gross lease, you are expected to pay an agreed percentage of your business's profits.

This model is beneficial if you expect your business to grow steadily or you expect your landlord to help promote your business. The downside, however, is that the more your company makes, the more your payments will increase.

In some cases, a property owner will allow tenants to enter into a lease-to-own agreement where a percentage of the monthly rent is put aside for a down payment to purchase the property after the leasing period is up. A lease-to-own agreement gives business owners the opportunity to get their business up and running and invest in their future at the same time.