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.