Leasing in Commercial Real Estate

Leasing in Commercial Real Estate

Commercial real estate leases are an agreement between the tenant and a landlord. However, it is not always that simple, as there are many different types of leases available to interested tenants. Taxes, insurance, and utilities are all variable factors in a rental agreement and will be determined by the type of lease you sign up for.

Full service lease:

Full service leases are the most common type of commercial rental agreements. These leases are most beneficial for the tenant, since the landlord is responsible for paying the utilities, property taxes, repairs, insurance, and even janitorial services. Since the landlord pays for the building’s maintenance, businesses are able to better anticipate the monthly costs associated with leasing the property.

Net lease:

As compared to a full service lease, the annual rent for net leases is much lower. With a net lease, the tenant is responsible for the property’s taxes, insurance, and common area maintenance (CAM) fees. Net leases can fall into three categories: single, double, and triple. Which leases are available to you will largely depend on your ability to negotiate with landlords and what type of property you are renting.

Single net lease (N lease):

In a single net lease, the tenant pays the base rent plus a pro-rata share of the building’s property taxes. A pro-rata share is determined by the portion of the building the tenant is occupying. The landlord will cover the building’s maintenance, but the tenant has to pay for the utilities and janitorial services. This type of lease is the most economical for tenants.

Double net lease (NN lease):

Double net leases are the middle ground between the tenant-friendly single net and the landlord-friendly triple net. With this rental agreement, the tenant pays base rent plus a pro-rata share of the building’s property taxes and property insurance. The tenant must also pay for the utilities and janitorial services, but the CAM fees and any structural repairs are covered by the landlord.

Triple net lease (NNN lease):

Landlords prefer triple net leases since the tenant must pay the base rent along with all property taxes, property insurance, and CAM. The tenant is also responsible for the utilities and janitorial services. Although the cost of rent may be lower, the added expenses of taxes, insurance, and maintenance should be carefully considered. Most retail and restaurant leases are triple net.  

Modified gross lease:

Modified gross leases are a flexible alternative to net leases. In this agreement, the tenant is responsible for paying the base rent, utilities, and janitorial services. However, the tenant and landlord will negotiate whether property taxes, property insurance, or CAM fees are included in the base rental rate. The advantage of a modified gross lease is that there are no hidden fees or unplanned expenses. If taxes, insurance, or CAM expenses increase, then the tenant’s rent won’t go up since these fees aren’t bundled with the base rent.

When you are investigating a piece of commercial real estate, don’t get carried away by the base rent. While the base rent is important, many other fees including taxes, insurance, utilities, and maintenance can dramatically increase or decrease the overall cost of the property. A lease with a higher base rent may be worth the price tag if additional property expenses are covered by the landlord. If you are considering renting a piece of property, reading the terms of the lease and negotiating with the landlord can help you afford a beautiful office space.

 

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