If you’re planning to lease a commercial property, learning as much as possible about commercial real estate is important as it will put you at an advantage and help you negotiate when necessary to get the best deal possible. Here are the answers to 14 common questions about leasing commercial real estate that you should know:
1. When is a property considered commercial?
A property is considered commercial when it’s used for business activities or to make a profit. Examples include industrial, retail, and office properties. Multifamily properties and development land are also considered commercial properties.
2. What is a letter of intent?
A letter of intent (LOI) is an agreement between the lessor and lessee before the actual lease agreement is signed. They aren’t legally binding like leases, although certain segments of them such as exclusivity and non-disclosure agreements can be.
3. What type of leases should I be aware of?
There are common property leases that tenants should be aware of prior to leasing a commercial space. These include gross leases (also known as full service), net leases, and modified gross leases. Each of these leases have different requirements for the lessee and the lessor.
4. What is a gross lease/full-service lease?
A gross lease or full-service lease puts the liability of property operating expenses such as utilities, maintenance, and property taxes in the tenant’s rent. The rent may be high, but this ensures that the rent price remains relatively stable. Some landlords may even add escalation clauses to temporarily increase rent to accommodate variable costs.
5. What is a net lease?
A net lease usually offers lower base rent than a gross lease and includes the tenant paying for fixed operating expenses such as common area maintenance (CAM), insurance and property taxes. There are 4 main types of net leases.
6. What is a single net lease?
A single net lease includes the tenant paying a fixed rent amount and a portion of property taxes which can be negotiated with the landlord. The tenant also pays utilities and other services and the landlord pays building expenses.
7. What is a double net lease?
This type of lease is similar to the single net lease, except property insurance is paid by the tenant in addition to property taxes. The tenant is also responsible for paying utilities and garbage services while the landlord pays for common area maintenance.
8. What is a triple net lease?
This type of lease includes a tenant paying all or a portion of insurance, common area maintenance, and property taxes. It’s considered one of the most common types of leases.
9. What is an absolute triple net lease?
In this type of lease agreement, the tenant is responsible for all costs, making them in charge of the entire building. This allows the tenant access to a building without buying it. The downside is that if the building gets destroyed, this will impact the tenant’s business negatively.
10. What is a modified gross lease?
A modified gross lease allows more room for negotiation regarding the operating expenses. The monthly lease rate remains the same regardless of variable costs.
11. What is CAM?
CAM (common area maintenance) refers to expenses paid by tenants to cover operating and overhead costs associated with common area spaces in commercial properties.
12. Can I sublease a commercial space?
If the original lease doesn’t have a clause prohibiting you from subleasing the commercial space, then you may have the ability to sublease. However, you may have to get written consent from your landlord to do so if the lease contains a term that details your right to transfer a leasehold.
13. What are tenant improvements and who’s responsible for paying for them?
These are improvements requested by the tenant using the property. They are usually paid for by the tenant, although in some cases the landlord may credit some of them. This is highly negotiable.
14. Can I find a commercial property that is specially designed for my business?
Build-to-suit buildings are tailored for a business’ particular needs. This happens when a business is unable to find an ideal property. The developer owns and operates the entire building and leases it to the tenant. Interested in learning more about build-to-suit building? Click here to learn about built-to-suit leases.
The information above should give you more insight leasing commercial properties, helping you make informed decisions in your pursuit of the ideal commercial space.