Understanding Different Types of Commercial Leases
Understanding the type of lease you are being asked to sign can be the ultimate success or failure of your business. If you want to be sure that the final cost you pay is what you expected going into the deal, take the time to learn about commercial leases. Before getting into the three basic types of commercial leases, let’s review some basic terms:
- Base rent is the minimum amount you will have to pay each month. You may either pay a flat rate or a dollar amount per square foot.
- When you are leasing a larger property where there are other tenants, the area that all tenants share in common is known as the common area.
- In addition to base rent, you may have to pay for operating expenses, such as property taxes, property insurance and CAM (common area maintenance charges). These are NNN fees.
- The usable square footage of the space you are leasing plus your percentage share of common area is referred to as rentable square footage.
What are the three types of commercial leases?
A net lease comes in three forms: triple net, double net and single net. Triple net means you share in three additional costs, in addition to your base rent. You are responsible for real estate taxes, insurance and maintenance. All three are added together by the landlord and passed onto you as an additional cost, per square foot, depending on the percentage of overall square feet you occupy and/or share in the common area. A double net lease drops the maintenance costs, but still holds you accountable for taxes and insurance. In a single net lease, the costs passed onto the tenant are negotiated. The most common of these is the triple net lease.
Signing a gross lease means the landlord pays for all property expenses that would be found in a net lease. That sounds pretty good, right? Think again. The base rent of a gross lease can include the expenses of operating the entire property.
Whether you negotiate a net or gross lease, you must learn how often the landlord’s expenses are calculated and allocated to each tenant. Ask how vacancies are treated. Does the landlord pick up CAM charges? In a net lease, be extra certain that the three net expenses are clearly defined.
The last type is the percentage lease. This means the tenant is paying a base rent on top of some percentage of monthly sales exceeding a set threshold. During months when sales do not reach the threshold, only the base rent is due. You will find this lease in retail businesses in malls or strip shopping centers. They are also appropriate for seasonal businesses whose sales can be unpredictable.
If you have any questions regarding a commercial lease for your business, contact this office for consultation.
The Law Office of H. Benjamin Sharlin LLC
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