Most Common Types of Commercial Real Estate Leases in California

This content is for educational purposes only and should not be considered legal or financial advice. Please consult a qualified real estate attorney before making any leasing decisions.

Introduction to Commercial Leases in California

Leasing commercial space in California comes with unique opportunities and considerations. Commercial leases differ significantly from residential ones – they tend to be more negotiable, and offer fewer automatic protections, this places the responsibility on the parties to craft fair terms that are fair for everyone involved. Understanding the common lease structures is crucial in California's competitive business environment. The main types of commercial leases you'll encounter are Full-Service Gross, Net (Single, Double, Triple Net), Modified Gross, and Percentage Leases. Each allocates costs and responsibilities differently between landlord and tenant.

California's commercial real estate market is dynamic, offering various lease structures that cater to different business needs. The type of lease that is used can significantly impact operational costs, flexibility, and long-term financial planning. Whether a business seeks predictability in expenses, lower initial costs, or shared risks with a landlord, selecting the right lease arrangement is essential. In the following sections, you will find break down the most common lease types in California and their pros and cons.

Full-Service Gross Lease

A full-service gross lease (or just gross lease) means the tenant pays one all-inclusive rent amount, and the landlord covers all the building's operating expenses out of that rent. This typically includes property taxes, property insurance, utilities, and maintenance of common areas. Such leases are common in multi-tenant office buildings and large complexes, where services are centralized. For the tenant, it's a convenient “one bill” arrangement.

Pros:

• Predictable costs – a fixed rent covers everything, simplifying budgeting.
• Landlord handles all maintenance and building operations (minimal responsibility for the tenant).

Cons:

• Higher rent – the landlord charges a premium to cover taxes, insurance, and other expenses.
• Little control over operating costs – tenants cannot reduce expenses or choose service providers (the landlord manages it all).

In California's major markets, full-service leases are popular for businesses that value simplicity and stability. Just be aware that the lease may include annual rent escalations to account for rising operating costs, so review how future increases are handled.

Net Leases (Single, Double, and Triple Net Leases)

A net lease requires the tenant to pay one or more expense categories on top of the base rent. The more “nets,” the more expenses the tenant takes on:

• Single Net (N): Tenant pays base rent plus property taxes for their space.
• Double Net (NN): Tenant pays base rent, property taxes, and insurance.
• Triple Net (NNN): Tenant pays base rent plus property taxes, insurance, and maintenance (common area upkeep, repairs, etc.).

Triple net leases are very common for stand-alone retail and industrial properties in California, as they make the tenant responsible for most costs of operation. Landlords like net leases because they receive a stable rent and pass through expenses to the tenant.

Pros:

• Lower base rent than a comparable gross lease, since the tenant is absorbing expenses.
• Tenants have greater autonomy over their operational costs, such as selecting maintenance providers and optimizing energy usage to reduce expenses.

Cons:

• Total cost can be unpredictable – taxes, insurance, and maintenance costs can fluctuate year to year. (For example, if the property is re-assessed at a higher value, the tenant’s tax bill can jump suddenly.)
• Greater responsibility – the tenant handles repairs and other operations, which can be a burden, especially for small businesses.

One key factor in net leases is the potential for fluctuating property-related expenses. Changes in property ownership, market conditions, or rising maintenance costs can lead to increased financial responsibility for tenants. To mitigate risk, tenants should carefully review lease agreements, understand how expenses are structured, and consider negotiating protections such as expense caps. While net leases provide cost savings and flexibility, they require careful budgeting and planning to manage variable costs effectively.

Modified Gross Lease

A modified gross lease is a hybrid of gross and net. The tenant pays a base rent and A portion of the property’s operating expenses is typically covered by the tenant, while the landlord manages the remainder. The specific division of these expenses is negotiated and can vary by lease agreement. For example, a tenant may pay base rent along with utilities and janitorial services for their unit, while the landlord is responsible for the building’s property taxes and insurance. Modified gross leases are common in multi-tenant buildings (like offices) where splitting certain costs is practical.

Pros:

• Stable base rent provides predictability in budgeting (no surprise rent jumps on the fixed portion).
• Shared expenses – tenants often end up paying for only the services they use, potentially saving money versus a full-service gross lease.

Cons:

• More complex lease terms – you must clearly negotiate who pays for what, which can be confusing and may require careful tracking.
• Some cost uncertainty – if the expenses you agree to share (utilities, maintenance, etc.) increase, your total cost goes up (not as predictable as a pure gross lease).

The modified gross lease offers flexibility. In California, many office leases use a modified gross structure (often with a “base year” provision for operating expenses). It’s a fair middle ground, but both parties should ensure the lease spells out expense responsibilities to avoid disputes.

Percentage Lease

A percentage lease is typically used in retail settings (malls, outlet centers, busy shopping districts). The tenant pays a base rent plus a percentage of gross sales over a certain threshold. For example, a boutique might pay $2,000/month base rent plus 5% of any monthly sales over $40,000. This way, the landlord’s income “percentage” grows when the tenant’s business does well.

Pros:

• Lower base rent – reduces fixed costs for the tenant, which is helpful for new or seasonal businesses (rent adjusts down in slow sales periods).
• Aligns incentives – landlord and tenant share the financial success, encouraging the landlord to maintain the property and drive foot traffic.

Cons:

• Lease complexity – determining the percentage, breakpoint, and handling sales reporting makes these leases more complicated to negotiate and administer.
• Unpredictable rent – in high sales periods, the additional rent can become very large, which means less profit for the tenant and difficulty budgeting long-term.

Percentage leases essentially share risk and reward. Many California shopping centers use them to attract tenants: the tenant isn’t overwhelmed by rent if sales are slow, and the landlord gains if the location is successful. If you consider a percentage lease, be prepared for detailed bookkeeping (you’ll likely need to report sales regularly) and analyze whether the total rent paid in a good year would still be sustainable for your business.