Understanding Commercial Lease Types: Which Option Is Right for Your Business?

TYPES OF LEASES AND WHICH IS BEST FOR YOUR PROPERTY

Choosing the right lease structure can make a big difference in how your commercial property performs over time. The lease type you select impacts everything from monthly income and operating responsibilities to long-term flexibility and risk.

At Miller Diversified Realty, we work with property owners to determine which lease structure best supports their goals. Some owners prefer a passive investment approach, while others want greater control over how their property is managed. Understanding the options available can help you make a confident and informed decision.

Below is our overview of common commercial lease types and when each might be the best fit for your property.

TRIPLE NET LEASE (NNN)

A Triple Net Lease requires the tenant to cover most property-related expenses in addition to base rent, including property taxes, insurance, and common area maintenance (CAM). What is CAM?

A quick overview of NNN leases:

• Each of the Net (“N”) expense represents a different aspect of the building’s operating costs that you are frequently sharing on, often on a prorated basis with other tenants int eh building.

• • Real Estate taxes
  • Building insurance
  • Common area maintenance (CAM)

Common area maintenance for “CAM” expenses is the item most frequently confused by Landlords, tenants and practitioners alike.  In part, because those in the industry often uses the words interchangeably when they really are not.  A common questions you might hear is “What are your CAM expenses for the building?” The question that is really being asked is “What are your NNN expenses?”  CAM expenses in and of themselves to do not include real estate taxes and insurance, but are made up of multiple other operating expense components, such as landscaping, snow removal, parking lot maintenance, or common area utilities (parking lot lighting).

• NNN charges change year to year, which is something to keep in mind.   This is both an advantage and disadvantage for landlords and tenants alike.

For landlords, the NNN structure often provides a buffer to variable or unpredictable  operating expenses such as snow removal, insurance  or real estate tax increases since tenants share the burden of  paying for operating costs.  For tenants, triple net leases can offer lower base rent reduced since some of the uncertainty of operating costs have been removed.

The primary disadvantage for tenants is the potential volatility of rental payments due to operating expense increases.  This can be particularly burdensome if the Landlord fails to budget monthly NNN expenses and can result in unexpected billings or overpayments.

“Part of being making a good decision on leasing a  property of interest by a tenant, is choosing a Landlord that is knowledgeable, experienced, and has a good track record on operating costs”. “  A well managed building by a Landlord or their professional property manager will limit volatile and unexpected invoices when NNN adjustments are made.”  says MDR broker Jerry Miller.   NNN adjustments to leases are usually performed on an annual basis, with adjustments to monthly rent reflecting the change.

GROSS LEASE (FULL-SERVICE LEASE)

A gross lease offers a simplified approach, where tenants pay one fixed monthly amount that includes rent, utilities, insurance, taxes, and maintenance costs.

This predictable structure allows tenants to budget more easily while leaving property management responsibilities with the Landlord. This makes it incumbent on the Landlord to manage operating expenses such that revenue is not lost to cost increases.   While the predictability of gross leases offers stability for the budget, in the end the tenant usually ends up paying more since it forces the Landlord to hedge their bets on cost increases into the future, to which a cushion is built in.  “I often compare it to a fixed rate for variable rate interest loan” says Jerry Miller.  “The rate on a variable rate loan is usually lower than that of a fixed rate loan since the consumer is accepting the burden of risk”.  Perhaps most important is the landlord or tenant’s willingness to take on this risk to determine if the gross lease is the best structure on not.

Other Common Lease Structures

In addition to the primary lease types, variations exist that distribute responsibilities differently:

Each option provides varying levels of cost responsibility and control.

CHOOSING THE RIGHT LEASE STRUCTURE

Selecting the appropriate lease type depends on several factors, including financial goals, desired level of involvement in property operations, and the nature of the business itself.

Questions to consider include:

• Is predictable monthly cost a priority?

• How much control over property operations is desired?
• Is long-term stability or short-term flexibility more important?
• What level of financial responsibility is appropriate for the business?

Working with an experienced commercial real estate professional can help clarify these considerations and identify opportunities that align with both immediate needs and long-term strategy.

PARTNERING WITH MILLER DIVERSIFIED REALTY

At Miller Diversified Realty, we understand that lease structures play a significant role in the success of both landlords and tenants. Our team provides guidance throughout the leasing process, helping clients evaluate options, understand responsibilities, and make confident decisions.

By aligning lease structures with business objectives, we help ensure each agreement supports operational efficiency and long-term growth.

ABOUT MILLER DIVERSIFIED

Miller Diversified is a family-owned company in Maumee, OH that offers real estate development, construction, brokerage, property management, and a real estate investment fund. The company has been in business for over 100 years and has a strong commitment to providing the greatest possible outcomes for clients and customers. For more information about Miller Diversified, visit millerdiversified.com.