What are the most common commercial lease structures and how do you choose the right one?

3 Modified Gross Lease

A modified gross lease is a lease structure that combines elements of a gross lease and a net lease. The tenant pays a fixed amount of rent that includes some of the operating expenses, while the landlord covers the rest. The exact division of expenses depends on the negotiation between the landlord and the tenant, but it is usually based on a pro rata share of the property's square footage. A modified gross lease is suitable for tenants and landlords who want to share some of the risk and flexibility of the operating costs.

4 Percentage Lease

A percentage lease is a lease structure where the tenant pays a base rent plus a percentage of their gross sales or revenue. This type of lease is common in retail properties, such as shopping malls, where the landlord benefits from the tenant's performance and foot traffic. A percentage lease can also include a breakpoint, which is the minimum amount of sales or revenue that the tenant has to generate before paying the percentage rent. It is suitable for tenants who want to align their rent with their sales and for landlords who want to participate in the tenant's success. When choosing the right commercial lease structure for your project, it depends on several factors such as property type, location, market conditions, tenant profile, financial goals, and risk appetite. Generally speaking, a gross lease is best if you want to simplify rent collection and offer competitive rent; a net lease if you want to transfer operating costs and maintenance obligations; a modified gross lease if you want to balance risk and reward of operating costs; and a percentage lease if you want to benefit from the tenant's performance and create a win-win situation.