Signing a New Commercial Lease? Here’s What to Look Out For

Commercial leases are notoriously complex, chiefly because there are several different types of them. If you’re in the market for a new space, it’s important to know what you’re getting into before signing on the dotted line. Here’s your cheat sheet to the various types of commercial real estate leases:

Net Lease

In a net lease, the rent is lower, but the tenant is also required to pay other expenses such as property tax, insurance, utilities and maintenance.

Here are three types of net leases:

• Single Net Lease. The tenant pays base rent plus a share of the building’s property tax, utilities and cleaning services. The landlord covers all other expenses related to the building.
• Double Net Lease. The tenant is responsible for base rent plus a share of the building’s property taxes and insurance on the property. The landlord covers repairs and common maintenance for the building.
• Triple Net Lease. The most common type of net lease for freestanding buildings and retail space is the triple net lease. This type of lease is more landlord-friendly because the tenant pays all or most of the property taxes, insurance and maintenance for the building. It’s important for tenants to carefully review the lease and associated fees. Costs associated with a triple net lease can also fluctuate due to operating expenses making budgeting tricky for tenants.

Even though it doesn’t seem like it, there are tenant benefits to signing a triple net lease. Tenants have access to the operating expenses and can compare those to actual charges. Monthly rent is typically less than in a gross lease as you, the retailer, have more financial responsibility when it comes to the building.

Gross Lease

In a gross lease or full-service lease, the tenant pays one lump sum for rent and the landlord then pays expenses from that lump sum. This type of lease is very tenant-friendly, as the landlord assumes responsibility for the building while the tenant can focus on their business. The landlord pays all or most of the expenses for the property including taxes, insurance and maintenance out of the rent received from the tenants.

Before entering this type of lease, make sure to ask how often janitorial services are provided and what types of services are included—because excess consumption may be charged back to you, the tenant.

Modified Gross Lease

A modified gross lease can be viewed as a compromise between a gross lease and a net lease. As is the case with a gross lease, rent is required in one lump sum. It also has components of a net lease, such as the tenant being responsible for property taxes, insurance and maintenance. The compromise is that tenants and landlords can negotiate what “net” components can be included in the base rent, including taxes, insurance, etc.

Takeaways

When looking at leasing options for your jewelry business, it’s important to:

++ Compare the different types of leases.

++ Keep in mind the extra expenses that you’ll incur with each lease, not just the base rent cost.

++ Work with an attorney to review the terms of a lease before you sign it.

++ If you’ve already signed a triple net lease or an absolute triple net lease, work with your insurance agent to arrange adequate limits of coverage.

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