Understanding Commercial Lease Types
A Guide for Tenants and Landlords
Understanding Commercial Lease Types
Matthew Wisniewski, CCIM
RE/MAX Commercial Group
Commercial Investment Group Lead
In commercial real estate leasing, there are many types of leases that are used for a variety of reason in the marketplace. When comparing spaces, you need to understand exactly what is included in your base rent and if you have any other obligations to the landlord.
Some of the occupancy expenses that can be included or separately billed in your lease include property taxes, insurance, trash, electric, gas, janitorial services, lawn and snow, common area maintenance, building repairs, building and parking lot maintenance and even property management expenses.
A gross lease includes all expenses including property taxes and utilities. Janitorial service is not included. Trash service may be included.
*Brokers Note: Gross leases are very tenant centric, making it easy to budget for monthly expenses. They are also great for landlords that don’t want to reconcile expenses yearly for their reimbursements. Note, you may have additional charges for “after hours” HVAC and building access if you need this. Make sure that you are clear in the lease terms if this is required.
Modified Gross means some, but not all of the expenses are included. This is the vaguest lease type which can mean a lot of different things.
*Brokers Note: The terms of the modified gross lease need to be well defined in the lease to avoid confusion in the future. Even if you feel like you have a verbal agreement on the expenses, you need to have it clear in writing.
This is the same as a modified gross lease, but specifically on industrial space.
*Brokers Note: Industrial gross is just a term used to describe the terms. There is no difference in the terminology of the lease.
Full-service leases include everything, including janitorial service.
*Brokers Note: Like the gross lease, the full-service lease is tenant centric. In addition to defining when you have access and any expenses for after hours use, we need to define how and when janitorial service happens.
Triple Net NNN Lease
Triple net leases are designed with the real estate investor in mind. Any and all variable expenses that could affect the rate of return of an investment, are passed through to the tenants.
*Brokers Note: The lease should define exactly which expenses are passed through and which ones are the landlords responsibility. In recent years, we have seen increasing limits to the expenses passed onto the tenant, limiting costs for major replacement of equipment. From the investor’s standpoint, this could change your returns and require reserves for Capex.
Absolute NNN Lease
Absolute NNN leases are like the NNN lease, but they include the tenants responsibly to replace the building if it was damaged or destroyed.
*Brokers Note: These lease types are generally to national corporations with the financial wherewithal to support a location that is no longer producing revenue.
NN or Double Net Lease
Generally, these leases are plus utilities and janitorial service.
*Brokers Note: This lease type in very common in Mid-Michigan for office leases.
If a landlord is passing expenses through to the tenant, the landlord generally has a contractual obligation to provide the tenant with accounting of the expenses and yearly reconciliation of the expenses. This is additional work that a professional management company is ideally positioned to complete but may be more work than a small investor wants to complete. Beware, if you have been overcharging your tenants on expenses, on purpose or just in failing to reconcile your expenses, you could open yourself up to refunds of fees, penalties and a poor reputation in the market.
If you are planning to sell an investment property in the future, NNN lease are the most popular lease type for investors and generally demand a premium as they are viewed as a limit of investor risk. If you aren’t on NNN leases now, you may wish to transition to this lease type before you go to market.
About RE/MAX Commercial Group:
Founded in 2009 and based in East Lansing Michigan, RE/MAX Commercial Group has assisted clients from all over the world acquire property for their real estate portfolios. With product specialists in Retail, Office Multi Family and Industrial investments as well as Business Brokerage, they are able to provide expertise in all facets of commercial real estate.
About the Author:
Matthew Wisniewski, CCIM has more than a decade experience in the commercial real estate investment field. In 2013 he earned the prestigious Certified Commercial Investment Member (CCIM) designation, is a past President of the CCIM Michigan Chapter, the current chapter Membership Chair as well as the 2021 Region 7 VP for CCIM Nationally. With hundreds of millions of dollars in transactional experience, his focus is on realistic growth planning and long-term strategies for creating generational wealth. You can reach Matthew here or by phone at 517-321-2800 Ext 118