Commercial Lease Types and Structures are a vital aspect of the commercial real estate leasing process for both property owners and tenants. Understanding these lease types is essential for property managers and business owners especially those entering their first lease as it helps them make informed decisions and avoid costly mistakes. This guide explains the main lease structures while discussing their advantages and disadvantages and demonstrates how Commercial Property Management Software can optimize your leasing operations.
A commercial lease is a legally binding agreement between a landlord and a business tenant. Unlike commercial agreements are more complex and flexible, tailored to the operational requirements of businesses. These leases typically outline terms such as rent, property use, duration, and responsibilities for maintenance, insurance, and taxes.
While both lease types serve as rental agreements, commercial leases differ from residential ones in several important ways:
Using Commercial Property Management Software allows landlords and managers to handle these complexities with greater ease, from drafting custom lease terms to tracking obligations.
Let’s dive into the various commercial lease types and structures commonly used in real estate. Each lease type distributes costs and responsibilities differently between landlords and tenants.
In a gross lease, tenants pay a fixed rent, while the landlord covers most, if not all, operating expenses. These include:
Best for: Tenants who prefer predictable monthly costs. Often used in multi-tenant office buildings.
Landlord Benefit: Higher rent can offset the risk of fluctuating expenses.
Net leases shift some or all operating expenses to the tenant. There are three main variations:
Triple Net Leases (NNN) are the most common, particularly in standalone retail and industrial properties.
Best for: Landlords seeking steady income with minimal responsibility.
Tenant Consideration: Be prepared for variable costs that fluctuate over time.
A modified gross lease is a hybrid structure that allows for cost-sharing between landlord and tenant. Typically:
Best for: Businesses that want a balance between predictable costs and shared responsibilities.
Landlord Advantage: Flexible terms that can attract a broader range of tenants.
In a percentage lease, the tenant pays base rent plus a percentage of their gross revenue. Common in retail, this structure aligns landlord and tenant interests.
Rent Calculation Example:
Base Rent: $5,000/month
Percentage: 5% of sales above $100,000
If monthly sales = $150,000 → Additional rent = 5% of $50,000 = $2,500
Total Rent = $7,500
Best for: Retailers, restaurants, and seasonal businesses with fluctuating income.
Landlord Incentive: Earns more as the tenant’s business grows.
An absolute NNN lease is the most tenant-heavy lease type, where the tenant is responsible for all property expenses, including:
Best for: Institutional investors looking for stable, hands-off returns.
Tenant Drawback: High financial burden; best suited for established businesses.
A ground lease allows tenants to lease land long-term (often 50–99 years) and construct their own buildings on it. At lease-end, ownership of improvements typically reverts to the landlord.
Best for: Developers and businesses in urban or high-demand areas that want to avoid land acquisition costs.
Landlord Advantage: Retains land ownership while benefiting from property improvements.
In a build-to-suit lease, the landlord constructs a building tailored to the tenant’s specifications. The construction cost is usually rolled into the rent.
Commonly used by: Corporate offices, retail chains, medical facilities, and industrial operations.
Tenant Benefit: A fully customized space without the capital investment of property ownership.
Landlord Advantage: Long-term lease agreements often justify construction investment.
When evaluating which lease type fits your business or property management strategy, consider the following factors:
The knowledge of commercial lease types and structures together with their obligations enables you to make smart business decisions. The different lease types offer unique advantages and disadvantages which affect your business planning and financial management and property expansion strategies. The right knowledge or commercial lease management software tools will help you simplify operations while reducing risks and maximizing returns.
