A business owner needs to have the proper lease to ensure that their company can thrive. Having the right lease can help you find a suitable space and make the most of your commercial real estate.
Unlike a personal lease, which typically only provides a monthly payment, a commercial lease offers a more complex explanation of how expenses will be split between the parties.
Before you start shopping for commercial property, you must understand the various terms of a lease.
Although leasing a commercial property can seem straightforward, there are various ways that the parties can split expenses. For instance, in some types of leases, the tenant is only responsible for a flat monthly rent, while the landlord is required to pay various expenses such as taxes and insurance.
Before signing a lease for commercial property, it’s crucial that you thoroughly understand the terms of the deal.
Net Lease
A net lease is a type of lease that requires the tenant to pay a portion of their expenses, such as property taxes and insurance and their monthly rent. This portion of their expenses will be calculated based on how much space they’re leasing.
A net lease is typically a bit unpredictable for a tenant, as their expenses can go up over time. Before signing a lease, be sure that you’re prepared for these changes.
There are three types of net leases.
A single net lease is similar to a traditional lease, except that the tenant is responsible for only one additional expense: property taxes.
A double net lease requires the tenant to pay a portion of their expenses, such as property taxes and insurance and their monthly rent.
A triple net lease is similar to a double net lease, except that the tenant is responsible for all of their expenses. These include property taxes, insurance, and maintenance costs.
Full-Service Lease
One of the most common commercial real estate lease types is a full-service lease, which is typically a more predictable structure for most tenants. It allows them to keep their monthly payments low and avoid unexpected expenses.
A full-service lease is typically found in office buildings and industrial properties. It allows tenants to keep their monthly payments low and avoid unexpected expenses.
A full-service lease is typically a contract with one fixed rental rate and includes all operating expenses, such as property taxes and insurance.
Although a full-service lease provides a predictable payment structure, it still has the potential to increase the tenant’s operating expenses in the second year of the contract. This is typically determined by the lease’s base year or expiration stop.
One of the most critical factors that a full-service lease should include is the presence of the utilities and janitorial services in the contract. This ensures that the tenant will be able to pass along any increases in operating expenses.
Absolute NNN Lease
Almost all of the financial responsibility for a property is taken care of by the tenant, who pays a fixed rent and a share of the building’s property taxes. An absolute NNN lease gives tenants full responsibility for all building maintenance costs.
Modified Gross Lease
A modified gross lease, also known as industrial gross lease, is a type of lease that doesn’t follow the same rules as a standard lease. It allows the landlord and tenant to specify who’s responsible for certain expenses. However, it’s essential to read the terms carefully to know which expenses are covered. For instance, in a modified gross lease, a tenant may be responsible for all the maintenance and insurance costs associated with the property.
The property owner also writes checks for the insurance and taxes. However, many of these expenses are usually negotiated between the parties. Some of these include property taxes, insurance, and common area maintenance.
Percentage Lease
A percentage lease requires the tenant to pay a base rent and a certain percentage of gross income, usually only when the income is over a certain threshold. This type of lease is commonly used for short-term retail rentals.
This type of lease is ideal for retailers that typically have seasonal income, as it allows them to keep their rent lower during slower periods. However, it’s important to note that a high percentage could prevent the business from growing.
Conclusion
It’s up to the tenant to know what type of property they want to include in their lease search, as each property owner will have their take on the lease structure and terms. While most items are negotiable, the lease structure and terms are typically set long before an offer or contract is made. By comparing and contrasting the various types of commercial real estate leases, you can make an informed decision regarding the risk and responsibility you should assume.
