Investing in commercial real estate can bring about many advantages in the form of low-touch income or a diversified portfolio. But not all commercial leases are the same, and even leases of the same type can have varying factors and deal details. In short, every commercial lease is usually as unique as the property itself, so it’s very important that you understand all the particulars and fine print of any property you’re considering adding to your portfolio.
While every deal will have its own specific details, understanding the different types of commercial leases and how they’re typically outlined overall will give you the knowledge you need to narrow your list of investment opportunities.
Investors often ask us about full service commercial leases and how they compare with other lease types such as triple net (NNN) leases.
We created this guide to help you understand full service leases and how they compare with other types of commercial lease agreements (such as triple net). Knowing the fine details of each lease type will help you view investment properties with the deeper level of insight needed to choose the best new property for your portfolio goals.
What is a Full Service Lease?
A commercial property agreement in which the tenant pays a monthly rent amount for use of the property or space. The property owner acts as the landlord, and is responsible for all the upkeep and expenses related to keeping the property functional for the tenant. Net lease landlord expenses typically include financial obligations such as:
- Property Taxes
- Insurance Premiums
- Maintenance and Upkeep Costs
What to Keep in Mind About a Full Service Lease Sample
Reviewing a full service lease sample agreement can help you get acquainted with the terminology and give you a framework of how different aspects of the lease are outlined.
However, it’s important to keep in mind that each lease will vary, so you should be looking for the specific responsibilities you’ll have as the property owner and also understand how rent payments are structured for the tenant over the term of the lease.
Pros and Cons of a Full Service Lease
As with any commercial lease, there are advantages and drawbacks to entering a full service lease.
From the tenant standpoint, a full service commercial lease is advantageous because they are only responsible for paying monthly rent on the space or property they use to run their business. This simplifies matters for the tenant because they don’t have to build operating costs into their business expenses (as with a triple net lease).
As an investor, a full service lease gives you complete control of your property because you must handle all the maintenance on the property and pay for costs such as taxes and insurance. With these factors in your control, you can ensure that your property is maintained according to your standards and also make sure that there are no lapses in insurance coverage or issues or delays with annual property tax payments.
While having complete control of your investment property in terms of upkeep, repairs, and on-time payments for important policies and taxes has its advantages, it’s also requires a substantial amount of hands-on effort and financial obligation as the owner and landlord of the property.
The time and money involved for the property owner in a full service lease is much more than in other lease types (like a triple net lease, which is mostly passive from an investor’s standpoint). If you’re looking into full service commercial lease properties, you must be prepared to invest both the time and funds needed to keep the property operational and turning a profit.
Additionally, since tenants in a full service lease are usually only responsible for a monthly rental payment, they’re not fully invested in the property as their business location. There are often shorter lease terms and higher tenant turnover in these types of properties, which means you will have to fill vacancies more frequently to keep a rental income stream flowing in consistently.
Full Service Lease Vs. Triple Net Lease
In a full service lease, the tenant is usually only responsible for one monthly rent sum that they pay to the property owner in exchange for use of the property. The landlord is responsible for all the operating expenses attached to the ongoing maintenance and upkeep of the property, such as taxes, insurance, maintenance, upgrades, etc.
However in a triple net lease (or NNN lease), the roles and responsibilities are essentially the reverse of a full service lease. In a NNN lease, the tenant typically pays a monthly rent sum but they must also cover operating expenses as part of their business costs, including:
- Annual Property Taxes
- Maintenance Fees
Triple net lease agreements are typically long-term, which means you have an contract in place with a tenant that usually ranges between 10 and 15 years. Since the tenant is investing in the property as a cost of operating their business, they’re more committed to making the location a long-term footprint for their business.
Having a high quality, trustworthy tenant in a long-term NNN lease is ideal for investors who want to achieve consistent, reliable returns (through regular rent payments) without having to take on all the responsibilities of a landlord, financial and otherwise.
Discover the best NNN tenant types here
NNN properties are also a great way to diversify your portfolio and create equity. For example, many of the clients we work with on triple net lease property purchases are wanting to transition away from high-touch apartment and condo ownership to a more passive investment in NNN properties with consistent returns.
Other Types of Commercial Leases
While triple net leases are the more common choice of investors (due to the many advantages offered in this type of deal) there are some other types of lease agreements you should know about as you determine which lease type fits best with your investment strategy.
As you review all the different lease types below, it’s important to keep in mind that each lease will vary in some unique way according to the property type and the lease terms. There’s really no such thing as a “standard” lease in commercial real estate, but knowing the different categories will give you a baseline understanding of what each type of lease typically includes.
Single Net Lease
In a single net lease, the tenant pays a monthly rental sum for use of a commercial space but they are also responsible for taking on the property taxes for the building or land they’re using. The tenant must build annual property taxes into their business costs and account for paying this sum each year they occupy the space.
Sometimes, the property owner in a single net lease will collect the tax funds from the tenant and remit the payment themselves to ensure that the payment is made on time to avoid fees or delays on tax payments.
Understanding the advantages of a single net lease
Double Net Lease
In a double net lease, the tenant pays monthly rent in addition to:
- Annual Property Taxes
- Insurance Policies and Premiums
The landlord in a double net lease is responsible for the upkeep and maintenance on the property, and will cover all the expenses for repairs, upgrades, and ongoing maintenance needed to keep the building or land in good condition.
Modified Gross Lease (AKA Industrial Gross Lease)
In a modified gross lease, the tenant pays monthly rent for use of the space as well as a portion of other expenses which can include taxes, insurance, and maintenance. These properties are usually industrial in nature, such as warehouses, factories, etc. These deals are designed to be mutually beneficial to both the tenant and the property owner by dividing expenses on the property between both parties.
The landlord and the tenant share certain expenses in a modified gross lease, so it’s important that you understand all the fine details in the agreement and know exactly what you’re responsible for (and what you’ll need to hold your tenant to financially according to the agreement).
There are many types of commercial leases, and choosing the type that aligns best with your investment goals and strategies is key to your long-term profitability. Working with a firm with expertise in all types of net lease real estate, like Sands Investment Group, will help you navigate all the different listings, lease types, and intricate lease clauses with confidence.
Sands Investment Group has extensive experience in all types of commercial real estate, and is an industry leader in the net lease investment space. We can help you navigate all the particulars of various lease types to ensure you choose the very best property for your investment goals. Our client-focused approach, extensive connections, and marketing expertise are just a few of the ways we’re leading the industry. In fact, we’re the fastest growing net lease investment company in America, with over 2,400 transactions in 48 states (to the tune of $5 Billion) since 2010.