Commercial Property Leases–What You Need to Know as a Business Owner

Commercial properties are much different than
residential properties. For starters, you can likely close a residential
property with a realtor within 30 to 45 days. On the other hand, a commercial
property will see you dealing with a real estate agent anywhere from sixty days
upwards to a year.

Commercial properties usually contain several
businesses, a bevy of tenants, and can be quite complex pieces of business. As
a business owner or individual interested in commercial real estate investing, you must
understand the difference between the types of commercial leases out there as
well as the common clauses included in them.

Types of Commercial Property Leases

In a full-service
gross lease
, the tenant pays a flat monthly fee to use the property, and
the landlord pays for operating and maintenance of common areas. The base rent
is normally higher in a full-service gross lease because a portion of
the funds needs to be spent on property maintenance.

Simplicity and convenience are the primary
benefits of this kind of commercial property lease. The tenant simply has to
pay one fee per month to rent and does not have to manage the property or
common areas.

Additionally, tenants do not have to worry
about inflation or rising costs–the landlord cannot raise rent unless in a
renegotiation or renewal period.

In a triple
net lease
or NNN lease, the tenant pays a base rental rate plus their share
of the property maintenance fees, taxes, and expenses (janitorial, landscaping,
etc.). If the tenant is the only one renting the building, they will be
required to pay for all expenses.

If the property is shared, tenants split the
expenses relative to the square footage they are renting. For example, if a
tenant is renting 1,000 square feet in a 10,000 square foot property, they
would be liable for 10% of the expenses.

Commercial Real Estate Lease
Clauses You Should Know

  • Leased Premises refers to the location in the
    property that is being rented and is usually accompanied by a unit number and
    exact square footage of the space.
  • Lease Term is the amount of time, including
    start and end dates, of the lease agreement. This can also include a provision
    for lease extension options.
  • Rent & Expense Reimbursements covers the
    type of lease–NNN or full-service–as well as the security deposit and any
    reimbursements regarding property expenses.
  • Permissible Uses specifies the ramifications
    should any illegal activity occur on the property and also outlines how tenants
    operate their businesses amongst each other.
  • Co-Tenancy is a clause that proposes a tenant
    get rental relief if the total occupancy of the property falls below a specific
    limit for a specified period of time.
  • Events of Default & Rights to Cure refer
    to a tenant’s ability to maintain the property and follow the guideline set
    forth. An event of default occurs when the tenant does not meet a lease
    obligation, such as failing to pay rent on time. A right to cure is the
    tenant’s ability to rectify the default within a certain time period before the
    default becomes a more severe punishment.
  • Tenant Improvement Allowance is common in
    retail and office spaces and refers to an amount the landlord may pay towards
    interior improvements on behalf of their tenants.
  • Assignment or Subleases are clauses intended
    to share the property lease or assign the lease to another tenant. Not all
    leases allow for this.

About the Author

Roni Davis is a writer, blogger, and legal assistant operating out of the greater Philadelphia area.

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