Types of Leases You Need to Know
As a business owner or landlord looking to lease property, it is important to understand the different types of leases that are available. Each type has its own advantages and disadvantages, and choosing the right lease can impact the success and profitability of your business. Here, we will go over the different types of leases that you need to know.
1. Gross Lease
A gross lease is also known as a full-service lease because the tenant pays a fixed rate each month, which covers all expenses. This includes rent, property taxes, insurance, maintenance, and utilities. This type of lease is common in commercial properties where the landlord wants to keep control over the property's expenses. The gross lease is the simplest and easiest type of lease for tenants to understand and is often preferred by new businesses or small businesses because it takes away the stress of having to budget for additional expenses.
2. Net Lease
A net lease is a lease in which the tenant pays a base or minimum rent in addition to some or all of the property's operating expenses. The operating expenses include things like property taxes, insurance, and maintenance. The tenant is also responsible for paying some or all utility bills. There are three types of net leases; single net lease, double net lease, and triple net lease. In a single net lease, the tenant pays rent and property taxes, whereas, in a double net lease, the tenant covers rent, property taxes, and insurance. In a triple net lease, the tenant pays rent, property taxes, insurance, maintenance, and utilities. The net lease is the most common type of commercial lease.
3. Modified Gross Lease
A modified gross lease is a combination of a gross and net lease. The tenant pays a fixed rent but is also responsible for paying some of the operating expenses. The allocated expenses are negotiated between the landlord and the tenant and are specified in the lease. This type of lease is beneficial for businesses that want to keep some control over their expenses but also want to avoid the pitfalls of a net lease.
4. Percentage Lease
A percentage lease is a lease in which the tenant's rent is based on a percentage of their gross sales or revenue. This type of lease is commonly used in retail stores, where the landlord needs to ensure that they are getting a fair share of the profits. Percentage leases often require a minimum base rent and a percentage of sales above a predetermined amount.
5. Ground Lease
A ground lease is a long-term lease of land on which the tenant builds a structure or improvement. This lease is commonly used for commercial developers or businesses that require a large amount of land for their operations. The lease usually lasts for a much longer period than other types of leases, sometimes up to 99 years. The tenant is responsible for all expenses, including the cost of building and maintaining the structure.
In conclusion, there are different types of leases, and choosing the right kind of lease for your business is essential. The gross lease is easy to understand and is preferred by small businesses, while a net lease is the most common type of commercial lease. A modified gross lease is often preferred to balance the advantages of gross and net leases, while a percentage lease is popular for retailers. The ground lease is suitable for businesses that need large amounts of land. Understanding these types of leases will help you make a more informed decision that will benefit your business in the long term.
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