Your Guide to Commercial Leases

After weeks of searching for your ideal commercial space, you have found the perfect one. You have turned in your application, your landlord or property management company is in agreeance that you will be pursuing this property. Now, it’s time to sign the lease. When it comes to a commercial lease, there are several different types and it is essential to know what it entails before any pen hits the page. Commercial leases determine how rent and other fees are calculated and who is responsible for cover the cost.

 

Types of Commercial Leases

TypeExpensesUse
Percentage LeaseTenant pays rent and a percentage of monthly salesRetail Spaces & Malls
Fully Serviced or Gross LeaseTenants covers rent; Landlord covers all operating expenses but may subject a “Load Factor” in rent to cover costOffice,  industrial, and retail spaces
Net LeaseTenant pays rent, some taxes, insurance and maintenance feesCommercial space
Double Net LeaseTenant pays rent, taxes, and insuranceCommercial space
Triple Net LeaseTenant pays rent, taxes, insurance, and maintenance feesCommercial space, long term leases
Modified Gross LeaseTenant pays rent and a portion of the buildings annual operating expenses after the base year of leaseCommercial space
Absolute LeaseTenant pays rent, taxes, insurance, maintenance, including roof and structure repairsLong term leases

 

Percentage Lease

Paying base rent plus a percentage of any revenue earned while doing business on a rental property, generally decreases the base rate for a tenant and offers the lessor additional upside potential. By providing the presence of an ideal location to capture more foot traffic, the lessor could find themselves receiving more at the end of month than they would if they were under any different type of lease.

The landlord and tenant must negotiate what is called a “breakpoint”, which is the level of sales needed to where the percentage lease begins, in addition to the base rent. There will also be a back and forth negotiating rent payment and percentage. A tenant could chose to do low rent with a high breakpoint or vice versa. Since a portion of the monthly payment is coming from sales, there may be a discussion amongst operating hours, auditing store sales, and other determinants.

Fully Serviced or Gross Lease

For exclusive use of the property, a gross lease allows the tenant to pay a flat rent fee. Typically, this rental fee is adjusted by the landlord to cover utilities and other expenses. A rental fee also may be subject to a “load factor” which refers to the usable square feet in addition to a percentage of the square feet of common area a tenant may benefit from. These common areas can include lobbies, restrooms, hallways, etc. If you wish to read more on how to calculate a load factor or understand more about it, visit here.

Net Lease

In addition to rent, a net lease entails the tenant paying for what could be a portion or all of the buildings operating expenses. These expenses include taxes and maintenance. Property owners often use this type of lease to release the burden of handling tasks, such as maintenance and taxes. This may result in the lessor making less money from a property, but they do not have to worry about day to day operations.

Double Net Lease

Different from a Single Net Lease, A Double Net Lease is when a tenant is responsible for both property taxes and premiums for insuring the building. A single net lease only requires a tenant to pay property taxes, rather than the Double requires more insurance payments. After used for commercial properties with multiple tenants, such as a mall, insurance fees would be assigned proportionally.

Triple Net Lease

In a Triple Net Lease, a tenant is solely responsible for all costs of the asset being leased in addition to rent. This requires the tenant to pay real estate taxes, building insurance, and common area maintenance. Because the tenant is covering these three costs, generally the rent is lower than a standard lease agreement. These leases typically last 10-15 years with a built-in rent escalation. This provides investors long term, stable income from the property.

Modified Gross Lease

On top of base rent, in a Modified Gross Lease, after a full calendar year under a lease, the tenant will pay a share of the buildings operating costs. A tenant’s share is based upon the percentage of the building that is being occupied. It could be as easy as if a tenant is renting 40% of the building space, then they would cover 40% of the operating costs. These leases are common amongst properties in which there are multiple tenants.

Absolute Lease

An Absolute Lease releases the landlord from all responsibility of the occupied space. Tenants are responsible for all building expenses, including any roof or structural repairs.

 

If you are interested in any commercial or warehouse properties, visit Schwarz Properties. We specialize in commercial and residential Property Management in the Asheboro, NC region. Find your ideal commercial, retail, warehouse, or office space here.