As a tenant, it is important to understand the different types of rent structures in commercial leasing. Rent structures refer to how rent is calculated and paid by tenants to landlords. The type of rent structure can significantly impact the tenant’s expenses and responsibilities. This article will explain the four main categories of rent structures in commercial leasing: gross lease, modified gross lease, net lease, and absolute net lease.
- Gross Lease
A gross lease is the simplest type of rent structure. In a gross lease, the tenant pays a fixed rent each month, and the landlord is responsible for all operating expenses, including utilities, taxes, insurance, and maintenance.
For example, suppose a tenant signs a gross lease for an office space of $2,000 per month. In that case, the landlord is responsible for paying all of the operating expenses associated with the property.
- Modified Gross Lease
A modified gross lease is similar to a gross lease, but the tenant may be responsible for some of the operating expenses. In a modified gross lease, the tenant and landlord agree on a base rent amount, and the tenant pays a portion of the operating expenses.
For example, if a tenant signs a modified gross lease for an office space of $2,000 per month, the landlord may be responsible for paying utilities and maintenance, but the tenant may be responsible for paying taxes and insurance.
The key difference between a modified gross lease and a single or double net lease (described below) is the extent to which the tenant is responsible for paying additional expenses beyond the base rent amount.
- Net Lease
A net lease is a rent structure in which the tenant is responsible for paying all or a portion of the operating expenses (e.g., property taxes, insurance, and maintenance costs) in addition to the base rent amount. The rent is “net” of these expenses, meaning that the tenant pays the base rent amount and then separately pays the operating expenses. There are three types of net leases: single net lease, double net lease, and triple net lease.
- Single Net Lease (Base Rent + Property Taxes): In a single net lease, the tenant is responsible for paying for one of the operating expenses, such as property taxes. For example, if a tenant signs a single net lease for an office space of $2,000 per month, the tenant may be responsible for paying for property taxes, while the landlord is responsible for paying for utilities, insurance, and maintenance.
- Double Net Lease (Base Rent + Property Taxes + Insurance). In a double net lease, the tenant is responsible for paying for two of the operating expenses, such as property taxes and insurance. For example, if a tenant signs a double net lease for an office space of $2,000 per month, the tenant may be responsible for paying for property taxes and insurance, while the landlord is responsible for paying for utilities and maintenance.
- Triple Net Lease (Base Rent + Property Taxes + Insurance + Maintenance Costs). In a triple net lease, the tenant is responsible for paying for all of the operating expenses, including property taxes, insurance, and maintenance costs (often loosely referred to as “CAM” or common area maintenance charges), but the landlord often has limited responsibility for maintaining the roof, foundation, and building structure. The CAM costs are typically paid by the landlord and pro-rated to the tenant based on the amount of space the tenant occupies. This is known as “passing through” common area maintenance costs to the tenant. For example, if a tenant signs a triple net lease for an office space of $2,000 per month, the tenant is responsible for paying for property taxes, insurance, and maintenance, in addition to the base rent amount.
- Absolute Net Lease
An absolute net lease is a type of rent structure where the tenant is responsible for paying the base rent rate, as well as the property’s taxes, insurance, and operating expenses directly. Unlike a triple net lease, tenants are also expected to be directly responsible for repairs to roofs, parking lots, and other building structures and systems. With an absolute net lease, the landlord essentially has zero responsibility for property costs. The absolute net lease structure is more common in single-tenant properties with longer lease terms. For example, a tenant leasing a standalone building on an absolute net lease basis would pay a fixed amount of rent each month, and the tenant would be directly responsible for all expenses (e.g., property tax, insurance, maintenance), including major repairs and replacements, at the tenant’s cost.
Key Takeaways:
- Rent structures are the terms and conditions that dictate how rent is calculated and paid by tenants.
- Gross lease: The tenant pays a fixed amount of rent each month, and the landlord is responsible for all operating expenses.
- Modified gross lease: Tenant and landlord agree on a base rent amount, and tenant pays a portion of operating expenses.
- Net lease: Tenant is responsible for paying a portion of operating expenses in addition to the base rent amount.
- Triple net lease: Tenant is responsible for paying for all operating expenses, including property taxes, insurance, and maintenance.
- Absolute net lease: Tenant is responsible for paying for all operating expenses, as well as any repairs or replacements needed for the building’s structure or systems.
