There are six common lease types (keeping in mind that there are variations in the marketplace):
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Gross Lease: Tenant pays fixed rent and the landlord is responsible for all operating expenses. A hybrid version (sometimes referred to as a modified gross lease) is found in the marketplace in which landlords include a reescalation clause in the lease to mitigate unexpected increases in operating costs during the lease term.
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Net (Single Net) Lease: Tenant pays a base rent plus a specific operating expense, such as property taxes or utilities. The landlord is responsible for the remaining operating expenses including structural repairs (e.g., the roof) and maintenance.
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Net/Net (Double Net) Lease: Tenant pays a base rent plus two operating expenses such as property taxes and insurance. The landlord is responsible for the remaining operating expenses including structural repairs (e.g., the roof) and maintenance.
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Net/Net/Net (Triple Net) Lease: Tenant pays a base rent plus all operating expenses. Sometimes, it is referred to as a pass-through lease (all operating expenses pass through to the tenant). But, caution is advised as landlords may include other capital-related expenses (e.g., structural repairs and upgrades) in the pass-through wording. See later discussion about rent and pass-throughs.
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Percentage Lease: Tenant pays base rent PLUS operating expenses (prorated share in the case of a retail mall) PLUS a percentage of gross income generated in excess of a pre-established minimum. With a percentage lease, the landlord generates revenue from the rental of the property, but also from the financial success of the tenant’s business. The tenant typically submits sales volumes and remits percentage rent to the landlord each month. The landlord, as an added benefit, gains an insider’s view of the tenant’s retailing performance and can better assess the risk of business failure.
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Ground (Land) Lease: Long-term lease of land only in which the tenant agrees to construct a building. Common in retail (e.g., pad lease for a restaurant on the perimeter of a shopping centre), but also found in office and industrial leasing. Landlord benefits include long-term rental revenue, the security of invested tenant dollars in improving the site and continued ownership of prime commercial land. Tenant benefits include prime location for retailing and avoidance of capital outlay to purchase land. BUT, the tenant can have challenges arranging suitable financing (as the land is not owned) and can be restricted if building expansion is needed (and the landlord as owner of the land doesn’t agree to the expansion).
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