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Commercial Lease Types and Key Terms in Office Space Negotiations

March 11, 2024

Commercial Lease Types

When negotiating a commercial real estate lease, it's important to understand the specific terms you'll be negotiating. This often depends on the type of commercial space you'll be leasing—office, retail, industrial, entire building, shared sublet, etc. And the space type often determines the kind of lease you'll sign. 

  1. Net Lease: In a net lease, the tenant pays a portion or all of the taxes, insurance, and maintenance costs for the property, in addition to rent. A Net Lease is most common in single-tenant properties, such as freestanding commercial buildings. This category has 3 subcategories: 

    a. Single Net Lease (N) - The tenant pays a pro-rata share of the building's property taxes.

    b. Double Net Lease (NN) - The tenant pays a pro-rata share of the building's property taxes and insurance.

    c. Triple net Lease (NNN) - The tenant pays a pro-rata share of all costs associated with the building, including property taxes, insurance, and maintenance. 

  2. Gross Lease: A gross lease is the opposite of a net lease; the landlord pays for the building's property taxes, insurance, and maintenance. The tenant is responsible only for the base rent. In NYC, a gross lease structure is often used with short-term leases, where the landlord rolls all of these expenses into the base rent. With office leases in NYC, the landlord typically pays the insurance and maintenance, and the property tax bill is applied in the 13th month of the lease. So, if a tenant rents an office for fewer than 12 months or so, the landlord will likely roll all of these costs into the base rent.

  3. Modified Gross Lease: This lease type is the most common for office leases in New York City. It is a hybrid between a gross lease and a net lease. The tenant and landlord negotiate which operating costs (taxes, insurance, and maintenance) the tenant will contribute to. In NYC, the norm is for the tenant to pay their proportionate share of property tax increases and usually some of the building's maintenance expenses, like a water or guard charge. The landlord maintains and pays for the building's insurance. However, the tenant must provide their own general liability insurance policy.

  4. Percentage Lease: A percentage lease is commonly found in the retail sector, particularly in malls and shopping centers. In this scenario, the retail tenant pays the landlord the base rent plus a percentage of their revenue. This arrangement aligns the interests of the landlord and tenant, as both benefit from the tenant's business success. The tenant usually pays a reduced rental rate in exchange for this partnership. 

  5. Fully Serviced Lease: Similar to a gross lease, in a fully serviced lease, the landlord also covers utilities, internet, and janitorial services, in addition to property taxes, insurance, and maintenance. This type of lease (often in the form of a license agreement) is typical with flexible workspace providers offering turnkey furnished offices. This arrangement is sometimes referred to as an all-inclusive lease.

So, most companies that sign office leases in NYC will have modified gross leases and share some of the building expenses with the landlord. However, if your company is renting a coworking space or subleasing office space in a shared suite with another firm, you'll likely have a fully serviced lease, which includes all the monthly expenses in the rent amount. 

Key Terms


Before you begin negotiating with a landlord to lease office space in NYC, you need to know what business points to address in the Letter of Intent. The following are the essential terms that should be included, however, each deal will have a few specific items to address, so it's important to consult with a real estate broker to ensure you're not missing anything. 

  • Offer Price — The offer price is usually the first thing that comes to mind when touring an office. How much is the office? How much do I offer? How is it priced compared to my current office space or another one I'm considering? The landlord almost always has an asking price, and the offer price is usually a little below that number. However, it all depends on the circumstances. 

  • Lease Term — The lease term is how long you plan to rent the office. The most common lease term for office space is five years, but there are no set rules. The term may be as short as one or two years if the office is prebuilt, meaning an existing installation is already in place, and the landlord is motivated to rent it. Remember that the more construction work you ask for, the less likely a landlord will be to accept a short-term lease. In other words, short-term leases are usually as-is deals. The landlord may paint and make necessary repairs but don't expect much more than that. Now, if you're subleasing office space (an entire suite, not a shared office space), the sublease term usually equals the remaining term of the sublandlord's master lease. If the sublandlord has 3.5 years remaining on their lease, they will not want to sublease the office for one year and then have to repeat the entire subleasing process again for the remaining 2.5 years.  

  • Landlord's Work — We touched on how the amount of landlord work can affect the lease term. Think of Newton's Third Law of Motion: "For every action, there is an equal and opposite reaction." In this case, the more work required of the landlord, the longer the term. Here is the reason: The expense of the construction work is a fixed amount. If the lease term is only one year, the entire cost of the work applies to that year; if it's a 2-year term, the work is amortized between the first and second year, 50/50; and if the company signs a 5-year lease term, the landlord can amortize the cost of construction over an even longer period at 20% per year. At any rate, in the proposal, the Landlord's Work section will describe what you're asking the landlord to do to the space. It could be as simple as painting the office and refinishing the floors or as complex as demolishing and rebuilding the entire space from scratch. 

  • Operating Expenses — In addition to the base rent, most landlords require the tenant to pay their proportionate share of operating expenses. These are costs associated with running and maintaining the building and might include separate charges for utilities, trash removal, cleaning, security guard, and common area maintenance (CAM charges). But, instead of itemizing every operating expense and passing it along to the tenant, most landlords build these costs into the rent and charge a base rent escalation to keep those costs in line with inflation and general price increases.

  • Base Rent Escalation—Unfortunately, the office rent you negotiate with the landlord does not remain fixed throughout the lease term. The base rent escalation is the percentage increase in the office rent annually. This number typically falls between 2-4%. For example, if your base rent is $10,000 per month and your escalation is 3%, the office rent in the second year of the lease will be $10,300, in the third year, $10,609, and so on.

  • Real Estate Taxes — On a multi-year office lease, the landlord will require the tenant to pay real estate taxes. Specifically, companies pay their proportionate share of real estate tax increases over a base year. That's a loaded sentence; there are three things to note. One, the proportionate share is the amount of taxes allocated to an individual office based on its relative size to the entire building. For example, if there is a 5-story building with equal-sized floors and your company rents one of the floors, then your proportionate share of the building is 20%. Therefore, you'd be responsible for 20% of the real estate taxes. Two, when you rent an office, the real estate taxes are built into the first year's rent, however, companies pay the ensuing tax increases. Going back to the 5-story building, if the taxes increase by 10% and your proportionate share of the building is 20%, then you're responsible for 2% of the tax increase. Third, the tax base year serves as the benchmark for the purpose of calculating the tenant's obligations for property tax increases. In NYC, property taxes are billed on a fiscal year basis, which runs from July 1st to June 30th of the following year. Tenants typically do not pay any real estate taxes until the second year (13th month) of the lease. 

  • Security Deposit — After reviewing the company's financial information, the landlord determines the security deposit. It's a negotiation, but the stronger the financials, the more leverage you'll have. Conversely, if the landlord perceives the company's financials as subpar, expect to pay a higher security deposit. In NYC, security deposits range from 3 months to 9 months for stand-alone suites, however, shared sublets and flexible workspace providers will often accept 2 months. And don't forget about the GGG! A Good-Guy Guarantee is an extra form of security for the landlord. When a principal of the company signs one, it helps mitigate the amount of security deposit. Make sure you understand the Good-Guy Guarantee

Understanding the types of commercial leases and key terms in office lease agreements is critical when negotiating commercial real estate leases. There are five primary commercial lease types, which vary depending on which costs pass through to the tenant, like taxes, insurance, and maintenance. In NYC, most office leases are structured as a Modified Gross Lease, ensuring tenants share some expenses with the landlord.

Next, we looked at what goes in the lease. When preparing to lease office space in NYC, you'll need to consider many things, such as the offer price, lease term, landlord's work, operating expenses, base rent escalation, real estate taxes, and the security deposit.

Each deal will have specific considerations, so consult with a commercial real estate broker to ensure you cover all your bases.