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Variety is the Spice of… Commercial Leases

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For start-ups and developing organizations alike, signing a lease for a commercial space is often assumed to be just like renting a home or apartment i.e. a lessee pays a specified amount of money to a lessor per month. When in reality there are several different types of commercial leases and basic structures that represent what a tenant is responsible for beyond monthly rent.

For the uninitiated; selecting, negotiating, and drafting a commercial lease can be an intimidating undertaking. If you are about to enter the realm of commercial real estate for the very first time or you have outgrown your current space and are looking to expand, you may find the various commercial lease options difficult to navigate.

What follows is a brief introduction to the most common commercial lease varieties and their differences.

What are the Different Types of Commercial Leases?

Commercials leases can vary widely from one property to another and many considerations must be made. Understanding which expenses and responsibilities of the lessee and lessor are covered or excluded are among the most important. Some leases place more expenses on the tenant, others on the landlord, and several fall somewhere in between.

Gross or Full-Service Leases

The titles “Gross” and “Full-Service” are almost interchangeable and are leases where nearly every or most property related costs may be included in your single monthly charge. While monthly rent may potentially be higher than normal, these types of leases benefit the tenant by enabling them to forecast expenses and better manage cash flow.

In a gross lease, a tenant’s rent is all inclusive in accordance with the negotiations within the lease agreement. This could include maintenance, insurance, real estate taxes, utilities, or janitorial services. It is important for tenants to understand what is included and ask questions regarding the handling of utility consumption, the frequency of services, and any other undefined expenses.

In a full-service lease, the landlord is responsible for all building expenses including maintenance, insurance, real estate taxes, and any other property related expenses. The tenant is responsible for their base rent and that’s it.

Net Leases

Net leases are highly adjustable commercial leases. While the base rent is typically much lower than that of a gross lease, the tenant may be responsible for several operating costs that may include insurance, taxes, and maintenance such as janitorial service, utilities, trash collection and more.

Single Net Lease: Tenants pay for some or all of a property’s real estate taxes as well as janitorial and utility services. While all other operating costs are the responsibility of the landlord.

Double Net Lease: In addition to real estate taxes, utilities, and janitorial service tenants are responsible for property insurance costs. A landlord is responsible for building maintenance and structural repairs.

Triple Net Lease: The most commonly used net lease, the triple net lease makes most expenses the responsibility of the tenant. Taxes, insurance, maintenance, and necessary services are paid on top of the base rent. The net lease structure is more favorable to landlords although net leases do give tenants the ability to review operating expenses of the landlord and any savings go back to the tenant.

Modified Gross Leases

Combining elements from net and full-service leases and offers a middle ground for both tenants and landlords when it comes to operating expenses. A modified gross lease allows for a wider range of negotiation and rent is based on the agreed upon terms.

The tenant advantage is that the landlord typically takes on the responsibility for property taxes, structural maintenance, and insurance while the tenant is responsible for their own utilities, interior maintenance, and janitorial service. This allows tenants to pay what is considered fairly predictable rates or fees without requiring an in-depth understanding of the real estate business.

Percentage Leases

Percentage leases are typically reserved for restaurants and retail stores. Under this type of lease, a tenant would pay their landlord a percentage of their gross sales above a specified amount on top of their base rent. This can benefit a tenant when business may be slow by eliminating extra fees but would have the opposite effect should your business perform well. But because a percentage lease helps to align the interest of both the tenant and landlord, properties are often well maintained.

Grow Your Business with California’s Leading Real Estate Attorneys

When considering your options for a commercial lease it is essential to compare different preferences and advantages while taking into account all expenses and not just the base rent. The real estate attorneys at Kundani, Chang, Khinda, Wilson LLP have worked with both startups and large corporations to provide counsel, aid in negotiations, and to draft thorough documentation with a vested interest in your success.

We have the knowledge and experience needed to close the deal. To learn more about how we can assist your business, please call or contact us online today! Our attorneys are here to help you find the right solution to your real estate requirements.

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