Leasing a commercial real estate property takes a lot of paperwork these days. There are so many moving parts and interlocking financial instruments that you practically end up with a financial law degree by the end of the whole deal. What a lot of people don’t necessarily know is that there are several types of commercial leases and depending on which you choose it could have different financial outcomes for you and your property and even your business. Let’s take a look at a few of the types of commercial leases and how they might affect your next buying decision.
“Net Lease” Variations You May Encounter
In commercial real estate you have to factor in more variables than if you were simply drawing up a lease to rent a residential apartment or house. For instance, your typical residential lease agreement puts most (reasonable) upkeep and maintenance costs solely on the property owner or landlord and not on the tenant. In commercial leases, especially a “Net Lease” it can mean that the tenant pays for some or even all of the maintenance and upkeep expenses associated with their part of the property (assuming it’s a multi-occupant space like a strip mall or business park). Under a net lease, your monthly rent amount may be lower than other types of commercial leases like a “gross lease” but you are responsible for paying part of the property tax, insurance premiums, and maintenance or upkeep as we mentioned before. Enquire with the lessor of potential properties you’re looking at to see what type of lease they are offering.
A “percentage lease” is another type of lease that is typically tailored to be for retail stores rather than office complexes. A percentage lease can be a beneficial two way street agreement for the landlord and the tenant. Here’s how: With a typical percentage lease you have a smaller fixed “base rent” and then you are required to add a percentage of that month's sales revenue on top. This can be beneficial because you don’t have a large fixed amount of money due each month, so if you have a slow month or an unforeseen drop in sales or supply chain issues for your products, you don’t owe a large amount at the end of the month. The downside is that if you have a big sales month then you are paying out more in rent which can cut into your bottom line. This is a good deal for businesses that may be starting out or have unpredictable sales rhythms.
Full Service Lease
This may sound familiar to many people who have rented a house or apartment. A full service lease is very similar in function to a typical residential lease. The overall rent is higher for the occupant, but it is all boiled down to one simple monthly payment that can be easily budgeted for, while the landlord takes care of just about everything else, including property tax, insurance, and even utilities. You may encounter this type of lease when renting an office space in a large or multi tenant office complex that is mostly focused on non-retail entities. If your business is very sensitive to overhead, then this may not be a good option because it is usually the highest overall monthly rent, however, you can benefit from this arrangement because it is a very low risk arrangement for tenants. Your monthly costs are pretty much stable, while if something goes catastrophically wrong with the building that requires an expensive fix, then you’re not responsible for it, the landlord is. Whereas with other lease agreements you may be on the hook for a percentage of that unexpected cost. Full service leases are for business owners who are more risk averse and like to keep things simple.
If you’d like to know more about commercial real estate or how to interpret the various types of lease agreements, then please contact me anytime! My phone number is: (208) 489-6172.