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Are you ready to take the next step and move your business out of your basement and into a professional office? Finding the right commercial property should come next. Acquiring professional space for business purposes is often a point of confusion when it comes to understanding the required lease agreements. It’s time to dispel the notion that commercial lease agreements are too complicated to understand, especially when you have the help of Chris Falk, an expert in commercial real estate.
Commercial real estate leases come in different shapes and sizes. It’s crucial for a tenant to understand the costs included in a contract and what expenses are not covered before signing anything. Why? Because some common leases exclude certain expenses. These expenditures can be wide-ranging—from property insurance to janitorial services and beyond. So, the total cost of renting a building can fluctuate according to which type of lease you’re signing.
This is the bare minimum amount that is required each month, independent of any other additional fees that may be added to the agreement. This is the most basic type of commercial property lease agreement that a tenant or landlord could utilize.
At their core, net leases are contracts that require the tenant to incur some of the property’s operating costs, along with a monthly base rent. These expenses range from property taxes to regular maintenance. Each type of net lease comes with advantages and disadvantages. Net leases fall into the following four, distinct categories.
Single Net Lease—Under this contract, the lessee pays the property taxes of the space being rented, along with the base rent established by the landlord. The benefit of a single net lease is a lower base rent than a full-service agreement, while not taking on too many of the operational costs that double or triple net contracts require. The disadvantage is that they aren’t as popular as the other types of net leases, thus harder to come by. While like a double or triple net lease, a single net lease does not limit the additional costs to only two or three. This lease agreement may have several extra costs beyond the base price with taxes and insurance.
Double Net Lease—This type of contract is similar to a single net lease but includes more of the building’s expenses than just its taxes. Here, tenants are responsible for paying building insurance and property taxes on top of the rent. Lessees still benefit from a lower base rent while avoiding the risk of repairs or major maintenance expenses. Expect to see double net agreements as you shop around, as they are quite popular among all types of commercial real estate. Oftentimes, this just means the tenant pays the taxes and insurance in addition to the base rent.
Triple Net Lease—Under a triple net lease, the lessee is responsible for covering most of the property’s expenses on top of the monthly rent. This includes property taxes, insurance and common area maintenance. These additional costs are often referred to as CAM charges. While the specifics of a triple net lease will vary between properties and landlords, the tenant is generally responsible for paying all expenses required to ensure the full functionality of the building being rented. Be prepared to encounter triple net agreements if you’re looking at commercial properties, as they are one of the most common in the industry. The only expenses a lessee won’t be expected to cover are significant roof or structural problems.
Absolute Net Lease—This type of net lease pushes all of the building’s expenses to the tenant. From the taxes and insurance to maintaining the parking lot, lessees of these agreements are responsible for everything related to the property. These typically occur on single-tenant buildings in which a landlord builds the property according to a tenant’s specifications and turns it over on a long-term basis.
The full-service lease is an appropriate moniker for an agreement that covers all (or most) of the operating expenses of a property. This is just a fancy way of saying that your landlord will pay for any extra costs that may arise beyond the base rent. While this might sound attractive, those additional potential costs will most likely be reflected in a more expensive base price. The upside is that the tenant doesn’t have to worry about separately paying those extra costs.
These typically require the landlord to pay property taxes, insurance and common area maintenance. This leaves the tenant to pay utilities, interior maintenance and janitorial costs. This is where a modified gross lease and full-service agreement differ, as lessees of a full-service agreement aren’t required to pay for utilities, interior maintenance or janitorial costs. Because the landlord takes on more expenses than a traditional net lease, the rent is usually higher.
So, what are the advantages for a tenant of a modified gross lease? The landlord takes on the risk of rising operating expenses and building management—like exterior maintenance. If you’re signing a modified gross contract, expect predictable rent and know you won’t have to deal with much of the property’s maintenance.
Keep in mind, modified leases come with potential drawbacks. Some landlords may charge a premium to take on the additional expenses and inherent risks associated with these agreements.
A percentage lease is an agreement that has nothing to do with the rental itself but is based on the tenant’s percentage of monthly sales. This is a common agreement if the rental is located within an area that is used for retail businesses.
Each type of commercial lease has its purpose and place within the commercial real estate industry. A basic understanding of the different parameters associated with each kind of agreement takes the guesswork out of finding the perfect fit for your company and its office needs.
Chris Falk is an expert in office lease types and has a broad understanding of how to best guide his clients to determine which circumstance will be most beneficial to their needs. Contact Chris Falk at 801-416-1024 or cfalk@ngacres.com or take a look at his full website.
For startups, understanding your budget and risk tolerance is crucial. Double net leases often offer lower base rent but require covering taxes and insurance. While full-service leases provide predictability, they might be pricier. Consider consulting Chris Falk for personalized guidance based on your specific needs.
Percentage leases can benefit high-volume businesses, as rent fluctuates with your sales. However, they involve less predictability. Rentable square footage offers a fixed cost based on usable space, ideal for businesses with more stable sales. Discuss your sales projections with Chris to determine the best option.
CAM stands for “Common Area Maintenance.” In a triple net lease, tenants cover these charges, which go towards maintaining shared spaces like hallways, restrooms, and landscaping. The lease should clearly outline CAM calculations and potential fluctuations.
Yes, in some cases. If budgeting for unpredictable expenses is challenging, a gross lease eliminates that concern. Additionally, if you suspect shared areas might require significant maintenance, a gross lease could offer cost certainty. Consult Chris to analyze your specific situation and make an informed decision.
It’s crucial to have a lawyer review your lease agreement before signing. Leases are complex documents with legal implications. Having professional guidance ensures you understand all terms, responsibilities, and potential risks involved.
Chris Falk is a Certified Commercial Investment Member (CCIM)—one of the most comprehensive commercial real estate designations, held by an estimated 6% of commercial brokers nationally. As a commercial real estate broker, Chris has handled over 600 transactions exceeding $475MM. Born and raised in Utah, Chris understands the unique qualities of the region and the great capacity for business opportunities in Northern Utah, including Davis, Weber and Salt Lake Counties. Chris is the premier, go-to agent for businesses and developers interested in this dynamic area.
