Types of Commercial Real Estate Leases

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When searching for a location for your business, one of the most viable options is a commercial lease. Rather than having to pay financing on a purchased property, a lease allows you access to a space, so that you can immediately begin doing business. The type of lease you choose could greatly affect your business in the future, though.

There are several different types of commercial real estate leases available: Net lease, modified net lease, and gross lease otherwise known as a full service lease.

The Net Lease

This type of lease is very common with retail and industrial space. It requires the tenant to pay most expenses associated with operation and maintenance of the property. Normally, this includes taxes and insurance related to the tenant’s rental unit. This lease is often preferred by landlords because it fixes their costs. When tenant expenses vary, as with industrial space, the net lease is a better choice for the landlord. Tenants will find that newer properties are usually better with a net lease than older properties since the cost of repairs and maintenance is higher in older space.

The Gross Lease or Full Service Lease

The gross lease is sometimes referred to as a full service lease. With this type of lease, the landlord pays for taxes, insurance and maintenance. It is used for office, industrial and retail space. The landlord collects fixed rents and pays the property expenses out of the rent. It’s common for the landlord to include escalation clauses in the lease to provide for increases over time as tax, insurance and maintenance expenses go up.

The Modified Net Lease

This lease type is a compromise between the gross lease and the net lease, since the landlord and tenant normally agree on a shared amount of maintenance expenses. The tenant then agrees to pay for taxes and insurance. Utilities may or may not be shared or fully paid by the tenant. A modified net lease can be used in industrial, retail or multi-tenant office space. Tenants usually find this type of lease more attractive than the net lease when the property is older. The flexibility and creative aspects of a modified net lease can provide the basis for reaching agreement between landlord and tenant when a net lease would not do so.

Now that you know about what kind of leases are available, it’s time to start your business, but don’t forget to ask the right questions!

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