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Types of Commercial Real Estate Leases: Finding the Right fit for Your Business

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By Kris Lindahl

Commercial real estate leases are vastly different than those used for residential properties. While a residential lease is typically a pretty straightforward matter with the tenant being responsible for the rent, as well as any utilities, commercial real estate leases are typically determined by the type of commercial business. Four of the most common types are outlined below.

1. Gross Lease

Sometimes also referred to as a full-service lease, a gross lease is one in which the landlord is responsible for paying for the insurance, taxes and maintenance of the property. In most cases, the landlord collects a fixed amount from each tenant and pays the expenses noted above from it. Many gross leases also contain escalation clauses that build in rent increases over time in an effort to offset the higher landlord costs that are projected in the future.

A gross lease is the ideal choice for industrial properties, as well as single- and multi-tenant office buildings. Accountants, attorneys and some types of consultants would also find a gross lease to be a good fit. Prior to signing a contract on a gross lease, however, it’s a good idea for the tenant to be able to project their rent expenses in the future given the presence of the escalation clauses and avoid any surprise rent increases.

2. Triple Net Lease

A popular commercial real estate lease option that is often found in use for those retail and industrial properties that have multiple tenants, a triple net lease works for the landlord when renting to those businesses whose expenses fluctuate widely. The bulk of the expenses associated with operating the property is placed squarely on the tenants.

Because businesses such as manufacturing plants, auto repair shops and other commercial ventures that are utility-heavy and/or tend to be harder on the structure, the triple net lease is the ideal choice for the landlord.

Tenants, on the other hand, need to be more vigilant about their expenses to ensure that their costs don’t spiral out of control. Tenants that rent space in older buildings might find that their utility and maintenance bills are higher because the building needs to be renovated due to its age.

3. Percentage Lease

A percentage lease could be the ideal fit for those commercial tenants whose sales fluctuate a great deal depending on the time of year and other economic factors. This type of lease works by the tenant paying a base rent, as well as an additional percentage that is determined by their monthly sales volume.

Ideal for a retail business that must rely on much of its sales around a season such as the holidays or summer to stay solvent, a percentage lease doesn’t mean that the landlord is entitled to all of the company’s earnings. In fact, because the landlord only gets a percentage of the sales volume once a certain threshold is met, this type of lease is ideal for businesses located in a mall setting or whose sales vary over time.

4. Modified Net Lease

The modified net lease can be described as a compromise between a triple net lease and a gross lease. It leaves more room for negotiations between the tenant and landlord with the maintenance expenses typically being split between them in some fashion. Utilities are another aspect of a modified net lease that is likely to be split between the two entities.

That being said, with a modified net lease, the tenant is typically responsible for paying taxes and insurance, along with their rent. Modified net leases are a popular compromise for those commercial businesses that have high expenditures for utilities. Older buildings that require more and higher maintenance costs are another good candidate for a modified net lease.

The above overview of the most common commercial real estate leases gives tenants a starting point when finding a good fit for their business. Reading over a proposed contract carefully before signing provides clear expectations for both parties.

 

Author Bio:

Minnesota real estate broker Kris Lindahl’s “All In” approach to life is key to success in his career as a leading real estate professional. His energy and devotion are a perfect fit for the lighting-fast pace of today’s real estate industry.

Find him at https://www.krislindahl.com/ or on Twitter @krislindahl.

 

Featured image via Flickr CC: Travis Wise

Make It Your Business to Choose Office Property Wisely

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One of the things that likely makes you a smart small business owner is that you’re always thinking ahead.

Whether it revolves around the next great product or service, how to provide your customers with even better service, or knowing how to properly grow your business, your mind is always focused on being prepared for what comes next.

With that in mind, are you considering growing your business in the coming months or years? If so, will such growth involve moving yourself and your employees to a new location?

In such situations, knowing what you are getting yourself and your business into should always be on your mind, especially when it involves a change from the ordinary.

So, let’s say you have outgrown your current office space, meaning there is nowhere left to expand. As a result, you must find a new location for you and your team to efficiently operate out of. In such a scenario, do you have all the necessary time to not only oversee the search, but then get all the relevant details on the new locale you’re intending to move to?

While some business owners will be able to navigate such tasks, others will undoubtedly let some of the work fall into the laps of their most trusted staff.

So, what happens if that person and/or you are not familiar with title insurance? Is it something you can overlook?

If you missed the course on title insurance, know that coverage from a title agency protects the buyer from any claims, encumbrances, and liens held by the seller. Essentially, the buyer walks away with a clean title to the property.

As a business owner, such coverage is not something to overlook, especially given the fact that the premiums are much less expensive than the potential legal fees you could be faced with should there be a dispute over the property at purchase.

To set a timeline for you, once the i’s and t’s on a contract to buy office space are dotted and crossed, the attorney for the purchaser will contact the title insurance provider and “order” the title. The insurer checks all necessary property records to update the seller’s title. In many cases, the finalizing of the title will run about 14 days or so. In the event there is a claim or lien on the title, you (the buyer) could have to navigate legal waters in order to resolve the dispute.

There could be issues such as the city having a right to construct or revamp a portion of the property, or local, federal or state governments having a lien on the site due to back taxes etc.

Whatever the dispute may be, being without title insurance can cost you and your business a pretty penny. Without “clearing” the title, you could end up in a precarious legal and financial hole.

Given there are different title insurance options out there for the buyer (owners, lender’s and extended coverage to name a few), make it your business to be versed on the subject well before you get the keys to your new office space.

Photo credit: gwblawfirm.com

About the Author: With 23 years’ writing experience, Dave Thomas covers a variety of small business topics.