Gross Lease
In a gross lease, the tenant pays a fixed rent, and the landlord pays all taxes, insurance, repairs, utilities, and the like connected with the property (usually called property charges or operating expenses). This is typically the type of rent structure involved in apartment rentals.
Net Lease
In a net lease, the tenant pays all or some of the property charges in addition to the base rent. The monthly base rental is net income for the landlord after operating costs have been paid. Leases for entire commercial or industrial buildings and the land on which they are located, ground leases, and long-term leases, are usually net leases.
In a triple-net lease, or net-net-net lease, the tenant pays all operating and other expenses in addition to rent. These expenses include:
CAM (common area maintenance and operating expenses) Taxes (Real Estate Taxes)
Insurance (Building, Liability and other Insurance Costs)
Percentage Lease
Either a gross lease or a net lease may be a percentage lease. The rent is based on a minimum fixed base monthly rental fee plus a percentage of the annual gross income received by the tenant doing business on the leased property. This type of lease is usually used for retail businesses and restaurants. The percentage charged is negotiable and varies depending on the nature of the business, the location of the property, and general economic conditions.
Variable Lease
Several types of leases allow for increases in the rental charges during the lease periods. One of the more common is the graduated lease, which provides for specified rent increases at set future dates. Another is the index lease, which allows rent to be increased or decreased periodically, based on changes in the consumer price index or some other indicator.
Ground Lease
When a landowner leases unimproved land to a tenant who agrees to erect a building on the land, the lease is usually referred to as a ground lease. Ground leases usually involve separate ownership of the land and buildings. These leases must be for a long enough term to make the transaction desirable to the tenant investing in the building and often run for terms of 50 years up to 99 years. Ground leases are generally net leases. The lessee must pay rent on the ground as well as real estate taxes, insurance, upkeep, and repairs.
Oil and Gas Lease
When an oil company leases land to explore for oil and gas, a special lease agreement must be negotiated. Usually, the landowner receives a cash payment for executing the lease. If no well is drilled within the period stated in the lease, the lease expires. However, most oil and gas leases permit the oil company to continue its rights for another year by paying another flat rental fee. Such rentals may be paid annually until a well is produced. If oil or gas is found, the landowner usually receives a percentage of its value as a royalty. As long as oil or gas is obtained in significant quantities, the lease continues indefinitely.
Lease with Option to Purchase
A lease purchase is used when a tenant wants to purchase the property but is unable to do so. Perhaps the tenant cannot obtain favorable financing or clear title, or the tax consequences of a current purchase would be unfavorable. In this arrangement, the purchase agreement is the primary consideration, and the lease is secondary. Part of the periodic rent is applied toward the purchase price of the property until that price is reduced to an amount for which the tenant can obtain financing or purchase the property outright, depending on the terms of the lease-purchase agreement.
Sale-and-leaseback
A sale-and-leaseback is the arrangement whereby the owners of property sell the property and then lease it back again for an agreed period and rental. A sale-and leaseback is often used when extra capital is needed on a construction project. The original owners pull out their equity to use on other projects and reduce their taxable income when they pay rent to the new owner. The new owner now has a reliable source of rental income for an extended time. Additionally, a lease is handled differently than an asset in relation to a firm’s balance sheet, so there may be some accounting advantages.
