The Different Types of Leases in Commercial Real Estate

In this article, you'll learn:

The key differences between full-service, triple-net, and modified gross leases.
How lease types impact your overall cost in commercial real estate.
Why reading the fine print in lease agreements is crucial.
How tenant representatives can help navigate lease negotiations.

When it comes to leasing office space, $30 per square foot isn't always $30 per square foot. One of the key factors in what your space will actually cost is the type of lease that you sign.

Full-Service (Gross) Leases

In a full service lease, sometimes also referred to as a "gross" lease, you pay your rent, and the landlord takes care of just about everything else. In exchange for your rent, they maintain the building, keep your space in good repair, provide electricity, heat and water, insure your physical space, provide janitorial service, and give you access to the building's services. You pay for insurance on your belongings, communications services, and the cost of running your building. That's it.

The running joke in the commercial real estate industry is that these leases are "gross" when you're a landlord because you get stuck with all of the bills!

Triple-Net Leases

A triple-net lease is the opposite of a full-service lease. When you have a triple-net structure, you pay all of the building's expenses. Technically, the three "nets" in a triple-net are building (or Common Area) expenses, taxes and insurance. You pay some of these nets -- like your utilities which are covered by your space's meter -- directly to the vendor. Others get paid by the landlord, but you get billed for your pro rata share. For example, if you occupy 15 percent of the building and it has a $500,000 property tax bill, you will pay $75,000, which is your fair share of that bill.

Landlords love triple net leases because they shift the liability for the cost of running the building to you. You might initially like the structure because triple net leases are almost always cheaper on paper than full service, but it's important to remember that the lower rent gets swallowed up by the operating costs that you pay. $40 in triple-net rent and $15 in operating expenses adds up to more than $53 in full service rent, after all!

Modified Gross and Something-Net Leases

Many leases fall in between the two extremes. In a single-net lease, you might pay the building's taxes while the landlord pays for the operating expenses and insurance. A modified gross lease could be one where the owner pays taxes, insurance and water service, but you pay for your electricity, gas and janitorial service. When you are looking at these types of lease structure, it becomes very important to carefully review the text of the lease to find out what you actually have to cover.

In The Real World...

Reading the fine print is the most important thing that you can do. You will encounter full service leases that have a hidden cap on the expenses that the landlord will pay, leaving you to pay for any increase. Your single net lease might have you paying for operating expenses instead of property taxes. Some buildings won't include janitorial service for your space in your full service rent. And your triple net lease could have additional charges -- like an administrative fee (a bill for sending you a bill!) on your operating expense reimbursements.

Since there are so many different types of leases and so many interpretations of what each lease type means, comparing different lease offers is a complicated process. The best way to protect yourself and make sure that you get the best deal possible is to work with professionals. Your tenant representative knows what landlords ask for and how to compare different proposals. He or she will simplify this complicated process and save you money in the long run.