Knowing the Different Types of Commercial Leases

Commercial real estate leases aren't created alike. $20 a foot isn't always $20 a foot. To understand how your lease works, you first need to see which of the many types of leases it falls under. Leases get defined based on who is your landlord, how long your lease runs, and what expenses you pay relative to your landlord.

Direct vs. Sublease

Usually, you lease space directly from the owner of the building or his or her representative (like an asset manager). These types of leases are called "direct leases," because it's just between you and the owner.

Sometimes, though, a tenant of a building ends up with a space that they don't need any more. In that instance, the owner usually still wants to get rent from them, so the tenant has to go out and find someone to pay the rent -- a "subtenant" -- so that they can use those rent payments to pay the owner for their original lease. These types of lease are called subleases, since you're a tenant under the original tenant. While subleases are usually lease expensive than direct space (since the original tenant is somewhat desperate to lease out their unused space!), they also usually have shorter terms and come with little or no allowances to help you move in and configure the space.

Short Term vs. Long Term

Most of the time, your company will make a relatively long-term commitment to space. Leases of three, five, seven or ten years are not uncommon. These long term types of leases usually carry the lowest rent and can come with inducements from the landlord -- like a period where you don't have to pay rent or money towards improving your space -- to get you to sign.

However, there are also types of leases that allow you to have a much shorter occupancy period. A month-to-month lease lets you choose to stay or go on a monthly basis. While this flexibility might be desirable, realize that it also leaves a lot of control in your landlord's hands, since he or she can decide to not renew your month-to-month lease or to change your rental rate.

Gross vs. Net

The most commonly discussed way to breakdown types of leases is by who pays for what. In some buildings, the landlord pays all of the expenses out of your rent payment. In others, you pay rent and you pay your share of the building's operating expenses as a second monthly charge. And in many buildings, what you pay falls somewhere between the two extremes.

Typically viewed as the most tenant-friendly option, the "full service" or "gross" lease places all fo the responsibility for the building's operating expenses on the landlord. You pay your monthly rent, and your landlord provides space, service, and utilities to it. Your full service lease might have some limitations, such as an expense stop which caps what the owner will pay or hours and days restrictions which can add a charge for having access to the space after hours. But even within those limitations, these types of leases still leave the landlord with most of the expenses.

The other extreme is the triple net lease. In a triple net lease, you pay your rent, then you also pay for your share of the building's property tax, insurance and operating expenses. In addition, you usually have your own utility accounts, which you pay directly. The face rent on a net lease is usually lower than on a gross lease, but you have additional costs that can add up quickly.

Regardless of what types of leases you think you are considering, the only way to be sure what your lease really includes is to read it. Some full service leases have carve outs that could leave you paying for janitorial service or electricity or repairs. And some net leases leave some expense responsibility with the landlord. Your tenant representative can help you figure out exactly where a given lease falls on the continuum.