Understanding Lease Types for Retail Properties: A Comprehensive Guide

When it comes to leasing retail properties, understanding the different lease types is essential for both property owners and tenants. The relationship between tenant and owner is dictated by the lease agreement, which defines who is responsible for what, how rent is structured, and what happens when things go wrong. From ground leases to triple net (NNN) leases, this blog will cover various lease types, tenant relationships, and key factors to keep in mind when navigating the commercial real estate market for retail properties.

1. Types of Retail Property Leases

Ground Lease

A ground lease is an agreement where the tenant leases the land and is responsible for building and maintaining the structure on the property. Ground leases are typically long-term (ranging from 20 to 99 years) and are commonly used for retail projects like big-box stores, restaurants, or franchise locations. The tenant may build a property or structure, but the land remains owned by the landlord. At the end of the lease term, ownership of the improvements may revert to the landowner unless otherwise negotiated.

Triple Net Lease (NNN)

In a triple net lease, the tenant agrees to pay not only rent but also the three key operating costs:

• Property Taxes
• Insurance
• Maintenance

This lease type is very popular for single-tenant retail properties, such as standalone fast-food restaurants or chain stores. Triple net leases are favored by landlords because they transfer the bulk of property-related expenses to the tenant, reducing risk.

Double Net Lease (NN)

A double net lease is similar to a triple net lease but with fewer responsibilities for the tenant. The tenant is responsible for property taxes and insurance, while the landlord covers structural repairs and maintenance. This lease type is common in multi-tenant buildings where shared services like roofing or plumbing require landlord oversight.

Single Net Lease (N)

In a single net lease, the tenant pays rent plus property taxes, while the landlord is responsible for insurance and maintenance costs. Single net leases are less common in retail but might appear in smaller retail spaces or boutique locations.

Percentage Lease

In a percentage lease, tenants pay a base rent plus a percentage of their monthly or annual sales revenue. This lease type is common in shopping malls or highly trafficked retail centers where tenant sales are strongly influenced by location.

Gross Lease

In a gross lease, the tenant pays a flat rent, and the landlord is responsible for all property-related expenses, including taxes, insurance, and maintenance. Gross leases are common in office spaces but can also apply to smaller retail units in multi-tenant buildings.

2. Understanding the Tenant-Landlord Relationship

Credit Tenants

A credit tenant is a tenant with a strong financial standing, often with a high credit rating or backed by a large corporation. These tenants are considered lower-risk for landlords because they are less likely to default on lease payments. Credit tenants often include national chains (e.g., Starbucks, Walmart) or franchisees of well-known brands.

Franchising Process

Many retail tenants are part of franchise operations, especially in the food and beverage industry. In this scenario, the franchisee rents the property, often under a triple net or ground lease, while operating under the franchisor’s brand. The franchisor typically provides operational support, while the franchisee bears responsibility for the lease terms.

Build-to-Suit Leases

In a build-to-suit lease, a tenant contracts a landlord to build a space specifically for their needs. This is often done for retail tenants with unique requirements, such as a drive-thru, special floor plans, or custom fixtures.

3. Lease Contract Structures and Rent Increases

Base Rent and CAM (Common Area Maintenance)

Retail leases typically involve a base rent, which is the fixed monthly or annual payment. Many leases also include Common Area Maintenance (CAM) fees to cover shared areas like parking lots, landscaping, and exterior lighting in multi-tenant properties.

Rent Increases

Most retail leases include rent escalations or annual increases based on inflation or market value. These increases are typically structured as:

• Fixed percentage increases: Rent increases by a set percentage annually (e.g., 2-3%).
• CPI adjustments: Rent increases based on the Consumer Price Index (CPI), which adjusts for inflation.
• Step increases: Rent rises in pre-defined steps at certain intervals, often every 3-5 years.

Tenant Defaults and Vacancies

If a tenant goes out of business or vacates a space before the end of the lease, there are typically penalties involved. Landlords can pursue remedies like:

• Accelerating rent: Requiring the tenant to pay all remaining rent due under the lease.
• Subleasing: Allowing the tenant to sublease the space to another business, with the landlord’s approval.
• Eviction: If the tenant defaults on their lease, the landlord can pursue eviction and may take legal action to recoup lost rent.

4. Single vs. Multi-Tenant Retail Properties

Single-Tenant Properties: These properties have only one tenant, typically under a long-term lease (e.g., NNN lease). Single-tenant properties are often more stable, particularly with credit tenants.

Multi-Tenant Properties: Shopping centers and retail strips with multiple tenants may use a mix of percentage leases and gross leases. Multi-tenant properties often offer more flexibility for landlords in terms of rent adjustments and tenant diversification.

5. Maximizing Value in Retail Leasing

To maximize value in retail leasing, landlords should:

• Choose creditworthy tenants who offer long-term stability.
• Ensure rent escalations are built into the lease to keep up with inflation.
• Diversify tenants in multi-tenant properties to spread risk across different types of retail businesses.
• Use technology to streamline leasing processes, tenant screening, and document management, which can help prevent costly disputes.

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Retail property leases can take many forms, from ground leases to triple net leases, each with its unique set of terms and responsibilities for landlords and tenants. Understanding the nuances of these lease structures, tenant relationships, and how rent increases and defaults are handled can help both property owners and tenants make informed decisions. Whether you’re leasing a multi-tenant shopping center or a single-tenant storefront, navigating the intricacies of retail real estate leasing requires a careful balance of risk management and financial planning.