Commercial property owners can often generate significant amounts of money by renting or leasing space to businesses. Before you jump into commercial leasing, though, you should learn about the common commercial lease types. There are a lot of options for you to know. Choosing the right one could make it easier for you to attract tenants and maximize your return on investment.
Single Net Lease
A single net lease (also referred to as an “N” lease) is similar to a residential lease in that the tenant pays a monthly base rate as well as a few common expenses, such as utilities, insurance and property maintenance.
The simplicity of a single net lease makes it one of the most popular commercial lease types.
Double Net Lease
The double net lease (also called an “NN” lease) is one of the common commercial lease types for multi-unit buildings. With this lease, renters are responsible for covering the base rent, property taxes and building insurance.
The property owner pays for everything else, including utilities. This makes it a useful option because the landlord does not need to have multiple meters installed to measure each tenant’s utilities.
Triple Net Lease
Triple net leases (also called “NNN” leases) can be complex contractual arrangements that make the renter and owner responsible for varying expenses. More often than not, the renter pays for insurance, property taxes, maintenance and utilities on top of the monthly base rate.
The renter is also responsible for repairing damage to the building. If the roof starts to leak, the renter pays for repairs.
These commercial lease types can get complicated when older systems wear out and need replacing. While the renter might need to pay for roof repairs, the property owner might need to pay to replace an old heating system.
As a property owner, you can expect to get paid less when you give someone an NNN lease. You also get to avoid a lot of costs, though, so it’s often a good option for owners who want passive income without much direct management.
You can learn more about triple net leases in this blog post.
Bondable Net Lease
Bondable net leases put all financial responsibilities on the tenant. Rents pay for insurance, utilities, maintenance, repairs and even major replacements. If the entire building burns down, the renter pays to have it rebuilt.
These commercial lease types are a little risky for renters. Still, some businesses will accept them because they tend to come with lower monthly rates. Property owners don’t make as much from leasing the building, but they also don’t need to worry about covering any expenses.
Full-Service Gross Lease
With a full-service gross lease, the tenant pays a set monthly rent and the property owner covers all of the additional costs. Since the owners accept more financial responsibility, they usually charge higher rates for full-service gross leases. Some businesses are willing to accept the higher amount because they want to know precisely how much they will spend on real estate each month.
Modified Gross Lease
A modified gross lease is very similar to a full-service gross lease. Most of the time, the renter pays a flat amount with these commercial lease types. They may need to pay an additional amount, though, when the owner’s expenses increase. For example, the tenant might need to cover a percentage of the property tax when the building’s tax increases.
With these commercial lease types, owners can deflect some financial burdens, which makes them appealing to investors who don’t mind managing properties but worry about rising costs.
Percentage Gross Lease
A percentage gross lease includes a monthly base payment plus a percentage of the tenant’s gross revenue. These commercial lease types are most commonly used with retail stores and restaurants.
In a percentage gross lease, owners know that they will receive a minimum payment each month. During busy times of the year, though, they can make exceptionally more money. The renter accepts the arrangement so they can pay lower rental prices during slow seasons.
You can create a percentage gross lease with any base amount and percentage. Keep in mind, though, that asking for a very high percentage will make potential tenants hesitant to rent your properties.
Here is an example of how percentage gross leases work.
The owner of a restaurant property charges $5,000 per month plus five percent of the tenant’s gross revenue. October is typically a slow month for the restaurant. This year, its gross income came to $12,000 in October, so it paid its landlord $5,600 ($5,000 + $12,000 * 0.05 = $5,600). August is a the restaurant’s busiest month. This year, its gross income came to $75,000 in August, so it paid the landlord $8,750 ($5,000 + $75,000 * 0.05 = $8,750).
As you can see, the monthly rates could vary significantly with a percentage gross lease. Both parties should think carefully about what base rate and percentage work for them before they sign a contract.
Typical Lease Terms
Commercial lease types have a variety of lease terms. Some businesses enter lease agreements that last decades. Others use month-to-month leases to test their profitability before making long-term commitments.
Typical lease terms occur in one-year, three-year and five-year increments. You can, however, set a lease’s length for any amount of time.
The lease’s term often influences the amount of money that landlord charges tenants. A five-year lease will usually have a lower per-month rate than a one-year lease. The longer the tenant commits to the location, the less risk the property owner accepts. Lower risk comes with lower rental rates.
Finding Commercial Properties for Sale
Choosing commercial lease types is only one part of increasing your investment’s ROI. You also need opportunities for purchasing commercial properties at affordable prices.
ProspectNow makes it easy for you to identify the current owners of commercial properties. Even when a business owns the property, ProspectNow gives you the contact information of the person in charge.
Want to learn more about how ProspectNow helps commercial real estate investors thrive? Schedule a free demo to see all of the platform’s features!