Choosing the right commercial lease structure is only half the equation. Once you’ve signed, the lease type you’re operating under directly shapes how you report expenses, classify assets and liabilities, and stay compliant under ASC 842 and IFRS 16. And with the real estate market continuing to shift (ie, hybrid work, e-commerce growth, ESG priorities) the lease structures businesses are choosing are evolving too.
This post covers both: how current market trends are influencing lease type preferences, and what those lease types mean for your accounting obligations.
If you need a refresher on the lease structures referenced below, see The 5 Main Types of Commercial Leases.
How the Real Estate Market Impacts Commercial Lease Type Choice
The current state of the real estate market plays a significant role in influencing not only lease negotiations but also the type of lease businesses might prefer.
- Retail Industry Trends: As e-commerce continues to expand, retailers are leaning toward triple net leases. These provide more control over operational costs, allowing businesses to invest in enhancing in-store experiences without unexpected financial burdens. This lease structure also gives landlords more predictable income, making it common in freestanding and single-tenant retail.
- Economic Uncertainty: In uncertain or inflationary climates, businesses often prefer gross leases to avoid fluctuating expenses. A fixed rent amount ensures predictable budgeting, which is critical for financial planning.
- Energy Efficiency: With sustainability becoming a top priority, some companies are opting for pass-through leases that include provisions for energy-efficient upgrades. Tenants can directly manage energy-saving projects and negotiate shared savings with landlords.
- Sustainability Priorities: As environmental, social, and governance (ESG) goals become more central to corporate strategy, some tenants prioritize lease structures, like triple net or modified gross, that allow direct control over operational upgrades. This enables companies to invest in energy efficiency and negotiate shared savings with landlords.
Commercial Lease Type Implications for Lease Accounting
Understanding the nature of the commercial lease type is essential for proper lease accounting, as it affects how expenses are treated under accounting standards such as FASB, ASC 842, and IFRS 16.
While the lease payment represents the amount paid for asset usage, common area maintenance expenses are typically considered variable expenses, separate from the lease component. Taxes are treated similarly, and considered excluded from the lease expense. Lessors should carefully allocate these expenses based on the lease type to accurately report their assets and liabilities.
The classification of these expenses varies depending on lease structure. For example:
- In a gross lease, nearly all costs are bundled into the fixed lease payment and classified as lease expense.
- In a triple net lease, only the base rent is capitalized; expenses like CAM, taxes, and insurance are accounted for separately.
- Modified gross leases require careful allocation depending on which costs are fixed vs. variable.
Accurate classification is critical for financial reporting, compliance, and audits. Both lessees and lessors should document cost components and allocate them based on lease type to ensure accurate reporting of assets and liabilities.
How Lease Accounting Software Supports All Commercial Lease Types
Lease accounting software simplifies the managing of various commercial lease types, ensuring businesses can track lease terms, expenses, and compliance requirements efficiently.
It offers a centralized platform for storing and monitoring key lease data. This allows accurate tracking of critical dates, lease-specific expenses like CAM fees, and financial commitments across multiple leases.
A lease accounting software also ensures compliance with accounting standards like ASC 842 and IFRS 16. By adopting a lease management system, businesses can enhance their efficiency, improve decision-making, and maintain compliance.
Understanding the different types of commercial leases is important for businesses and landlords. Whether you’re negotiating a triple net lease, gross leases, pass-through lease, the right knowledge and tools can significantly impact your financial outcomes.
To take your lease management to the next level, consider a real estate lease accounting softwarelike Visual Lease. Our lease accounting software is designed to simplify complex lease terms, automate calculations, and ensure compliance with accounting standards like ASC 842 and IFRS 16.
With tools for tracking lease types, generating reports, and managing critical dates, Visual Lease empowers businesses to make smarter decisions and maximize the value of their lease agreements. Want to see how it works? Request a demo today.