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Understanding the most common types of commercial leases

On Behalf of | Mar 6, 2023 | Commercial Real Estate |

In Michigan, commercial leases have several variables affecting the terms and methods used to calculate rents. Understanding the most common commercial leases and the mechanics of those calculations is crucial for tenants to ensure their lease contract is fair and allows for a profitable business.

The three most common commercial leases are full-service gross, percentage and net leases and each suits a particular type of business. The following provides an overview of how to calculate each lease type.

Full-service gross lease

In a full-service gross lease, the tenant pays fixed rent each month. The rental payment includes the tenant’s share of utilities, maintenance and property taxes. The amount can also include landscaping, janitorial and common area maintenance costs. The landlord is responsible for the entire building’s maintenance, utilities and other expenses.

A modified-gross lease is similar but is a gross and net lease hybrid. The tenant generally has responsibility for paying expenses directly relating to their business, such as water and electricity usage. The landlord may cover expenses such as insurance and property taxes that are not explicitly associated with the tenant’s use of the business space.

Percentage lease

In a percentage lease, the tenant will pay a base amount of rent each month plus a specified percentage of their gross sales amount. A variation of this lease requires the tenant to pay a fixed percentage of revenue, such as 5%, in addition to their base rent.

The landlord usually negotiates the sales percentage based on the tenant’s projections. In commercial real estate, this lease is commonly used for retail spaces.

Net leases

Net leases come in three variations: Single, double or triple-net. Each variation of a net lease requires the tenant to pay different expenses besides a base rent payment. In a single-net type of lease, the tenant pays a base rent and property taxes, while the landlord covers utilities, maintenance and other expenses.

In double-net commercial leases, the tenant pays their base rent, property taxes and insurance while the landlord covers all remaining expenses. In a triple-net lease, the tenant must pay for maintenance costs in addition to all the costs they would pay in a double-net lease.

An awareness of the different commercial lease types can help tenants prepare for a favorable lease negotiation with a potential landlord.