When it comes to commercial leases, there are various types and terms that can be confusing for both lessors and lessees. Among these terms are “triple net leases,” “pass-through leases,” and “bondable leases,” which may vary in naming conventions depending on the region. Understanding the different types of commercial leases is essential for both parties involved. Let’s take a look into the meaning of triple net leases and explore various types of commercial leases to shed light on their characteristics and implications.
Types of Commercial Leases
In broad terms, commercial leases can be categorized based on what is being paid for and how it is paid. Unlike residential leases, commercial leases typically involve more than just a base rent. Let’s explore the primary commercial real estate lease types.
Gross Lease
A gross lease is similar to renting an apartment for personal use. In this type of lease, the lessor includes all expenses, such as snow removal, lawn maintenance, and hallway lighting, in the rent payment. This is the simplest form of a commercial lease, but it is relatively uncommon in the commercial real estate market.
Example of a Gross Lease
A small business renting a shared coworking space. A company may favor a gross lease to simplify expenses, as the landlord assumes responsibility for all operating costs, such as utilities, maintenance, and property taxes.
Triple Net Lease (NNN lease)
Triple net leases (NNN leases) are frequently seen in retail leases. In this type of lease, the lessee assumes responsibility for additional expenses beyond the base rent. These expenses typically include common area maintenance (CAM), property taxes, and property insurance. The lessee pays the base rent “net” of these three expense categories. Hence, it is called a triple net lease.
Example of a Triple Net Lease
A national retail chain might opt for a triple net lease to gain control over property taxes, insurance, and maintenance expenses to ensure transparency and flexibility across their portfolio.
Pass-Through Lease
Pass-through leases, also known as bondable leases, differ slightly from triple net leases. In a pass-through lease, the tenant directly assumes the costs of expenses such as snow removal, landscaping, and property taxes. The tenant reimburses the landlord for these expenses separately from the rent payment. This type of lease is commonly found in freestanding buildings like banks or fast-food restaurants.
Modified Gross Lease
A modified gross lease is often seen in office buildings, combining elements of both gross and net leases. Under this type of lease, operating expenses, property taxes, and insurance are typically included in the initial base year rent. However, any increases in these expenses over the base year are charged to the tenant based on their pro-rata share. The exact terms may vary, specifying either the actual expenses or an increase over a base amount.
Example of a Modified Gross Lease
For instance, a startup leasing office space might prefer a modified gross lease to benefit from predictable base rent while managing incremental cost increases over time.
Comparing Commercial Lease Types
Triple Net Lease (NNN Lease) vs. Gross Lease
The key difference between a triple net lease and a gross lease is who covers additional expenses. In a triple net lease, the tenant pays the base rent plus expenses for common area maintenance (CAM), property taxes, and property insurance. In a gross lease, the tenant pays a fixed rent, and the landlord covers all other property expenses. This makes it simpler for the tenant but often results in a higher rent.
Triple Net Lease (NNN Lease) vs. Pass-Through Lease
The main difference between a triple net lease and a pass-through lease is how expenses are handled. In a triple net lease, the tenant pays base rent plus CAM, property taxes, and insurance directly to the landlord. In a pass-through lease, the tenant reimburses the landlord for specific expenses such as property taxes, insurance, and maintenance separately from the base rent. This often results in more transparent cost allocation.
Triple Net Lease (NNN Lease) vs. Modified Gross Lease
The difference between a triple net lease and a modified gross lease is the structure of expenses. Triple net leases have lower base rent with separate additional expenses, while modified gross leases combine elements of gross and net leases. In a modified gross lease, the base year rent includes certain expenses, but any increases in these expenses over the base year are charged to the tenant. This offers a balance between predictability and flexibility in managing expenses.
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. Here’s how specific trends impact lease selection:
- Post-Pandemic Adjustments: The rise of hybrid work has driven demand for flexibility, leading many businesses to favor modified gross leases. These allow companies to scale costs in line with their usage, a key benefit when office space needs are changing.
- Retail Industry Trends: As e-commerce continues to expand, retailers are leaning toward triple net leases. These provide control over operational costs, allowing businesses to invest in enhancing in-store experiences without unexpected financial burdens.
- 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.
- Economic Changes: In uncertain economic climates, businesses often prefer gross leases to avoid the unpredictable, fluctuating expenses, ensuring a stable financial plan.
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 Role of Real Estate Lease Accounting Software
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 software like 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.
