Choosing the right commercial lease can make a significant difference in your business's financial health and operational efficiency. Here’s a breakdown of the most common commercial lease types to help you make an informed decision.
1. Gross Lease
In a gross lease, the tenant pays a fixed rent amount that typically includes taxes and insurance with base year expense stops. Common Area Maintenance (CAM) is usually an additional rent item. Tenants also pay their own utilities, General Liability Insurance and all mechanical maintenance. Landlord is generally responsible for the structure and the roof. This lease type offers simplicity and predictability as you know your exact rent and estimated CAM each month.
Pros:
Predictable monthly expenses
Cons:
Higher base rent and year end reconciliation of CAM, Taxes and Property Casualty Insurance is a risk.
Tenant is responsible for maintenance, repair and replacement of mechanical systems.
2. Net Lease
A net lease requires the tenant to pay their Base Rent and additional amount to cover Landlord’s estimated taxes, insurance, CAM and the building utilities.
Pros:
Lower base rent
Cons:
Year End reconciliation of expenses is always a risk to the budget.
Tenant is responsible for maintenance repair and replacement of mechanical systems
3. Modified Gross Lease
A hybrid, the modified gross lease allows the Landlord or owner of a building to include a component of the building expenses, such as water, or electricity or some other expense that might be more convenient for the building ownership to include in the base rent and pay rather than have the Tenant pay separately.
Pros:
Flexible expense allocation for the Landlord
Predictable base rent
Cons:
Year End reconciliation of expenses is always a risk to the budget.
Tenant is responsible for maintenance repair and replacement of mechanical systems
4. Percentage Lease
In a percentage lease, the tenant pays a base rent plus a percentage of their business's gross sales. This type is common in high volume and high end retail spaces.
Pros:
Lower base rent
Cons:
Higher rent during peak sales periods
Complex accounting and auditing of rent
5. Full Service Lease
A full service lease or slight variation is generally what is used in the office market. There may be variations depending on the development and ownership but most office leases are full service and include base rent, utilities, CAM, taxes, insurance and janitorial. Landlord is responsible for the roof and the structure.
Pros:
Annual Rent and Expenses are known.
Cons:
Year End reconciliation of expenses is always a risk to the budget.
Understanding Your Lease
Each property and each ownership may have a variation to their lease document.
Why You Need a Real Estate Advisor
Leases of all types can be a labyrinth of legal jargon and fine print. A savvy advisor can help you navigate these complexities and ensure you're getting a deal you can understand. Here at Serrone Hunter, we can also help you negotiate terms, so you don’t end up responsible for unexpected repairs or other hidden costs.
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