Understanding types of leases critical for tenants, landlords

There are several types of commercial Leases that you may encounter when you finally come to terms with your prospective landlord.  In Boulder County, triple-net (NNN) leases are the most common.  You may also see a “gross” lease or a “modified gross” lease.  These leases are somewhat similar to residential leases in that they can be pretty simple documents, although that’s not always in the best interests of the parties to the lease (often what looks be “easy” at the start becomes more challenging later on).

Retail leases sometimes have additional lease provisions for “percentage rent.”  This is a lease whose rental is based on a percentage of the monthly or more often the annual gross sales made on the premises, by the tenant.  Percentage leases are most often done with large retail stores, usually in shopping centers.  Anyone trying to put together a lease with a percentage rent provision should be working with a local agent to navigate your way through it.

A final type of lease we’ll discuss in the next article is one that uses a “base period” or a “base year.”  This lease type is more common in Denver than Boulder, which again, is predominately a triple-net lease town.

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The “nets” in a triple-net lease are essentially property-management accounting practices for the costs associated with keeping a building operating.  A simple way to think of the nets is that they are the expenses that are not included in the base rent; call them the “nots.”  The three most commonly referred to “nots” are: 1) building insurance, 2) building property taxes and 3) the CAM (Common Area Maintenance) charges.  It’s always important to find out what are included in a building’s nets and how they manage their CAM charges.  Which utilities are included in the nets?  Is janitorial a part of the CAM?  These are questions your agent will help you with in your space search.

Triple-net leases are popular with building owners because of the overall management and accounting of the property as a financial asset.  It’s important to recognize that commercial real estate is primarily a financial consideration for investors.  With triple-net leases, each and every expense of that building is passed along to the tenants of the building, and they are accounted for accordingly.  This is, in essence, good for both the ownership of the building and the tenants that occupy it.  Everyone involved can use the accounting statements provided to maximize their business tax deductions and keep clean records for their businesses.

Gross leases or modified gross leases are less popular due primarily to the lower levels of accounting efficiencies.  They may be less complicated, but they often leave the door wide open for lawsuits from any number of potential victims.  Gross leases are sometimes referred to as “full-service gross leases” if they include all the utilities charges.  Modified gross leases are often just single or double net leases, with either the property taxes and/or building insurance left out of the tenant’s rent.  Landlords will have their own management styles for the buildings they run, and they sometimes mix up the rents simply for marketing as much as anything else.  Again, it’s most important to find out exactly what is included in each of these lease types.  Every building will be different, and it will be up to you with the help of your agent to find out what the deal is with the one you want.

Jim Ditzel and Tim Conarro are brokers with Summit Commercial Brokers. They can be reached at jim@summitcbr.com and
timconarro@gmail.com.