The Basics of a Commercial Real Estate Lease – What You Need to Know
Every business owner who leases commercial real estate should have a basic understanding of what goes into a typical lease. This allows business owners to avoid confusion and unexpected surprises when signing a commercial lease. Informed business owners spend less time clarifying simple questions and can quickly approach a potential landlord to close deals. In fact, executives who understand the basics of commercial real estate leases are more likely to:
- Identify leases with favorable terms
- Understand their business’ needs and jump on opportunities as they arrive
- Spot red flags and avoid leases that may become a burden
The Mid-Ohio Valley commercial real estate market provides unique challenges. As it is a stable, but slow-growth area, new leases are not often available. The area is full of many well-established businesses that have found their ideal location and see no need to move. This means that new or growing businesses must be ready to act quickly when a property does open up since these opportunities are not always available. However, in that haste, it’s important that one slow down enough to fully understand the lease terms for the space. The PM Company encourages everyone looking at commercial real estate to brush up on the basics of a commercial lease. This allows interested parties to act decisively and quickly, while protecting current and future interests. We’ve provided a quick overview of the basics of a commercial real estate lease.
What Items Are Usually on A Basic Commercial Real Estate Lease?
Most lease contracts will include the following elements.
Both parties will provide addresses for receiving official communication. If the landlord needs to notify you of an issue regarding the commercial property, this is where they will send the information.
The property owner will provide a written, legal description of the commercial real estate property. This description should be thorough and accurate to prevent misrepresentations.
The lease contract should also lay out the details of your security deposit. Specific points might include the total value of the deposit, what the deposit will secure, when it becomes refundable, and whether or not it can apply to your rent.
Use of premises
Acceptable use of the property will depend on zoning rules and property management stipulations. For example, heavy industrial work cannot happen in a building zoned for commercial retail. The property manager might also limit loud businesses (like a nightclub or doggy daycare) to protect the other tenants from unwanted noise.
Defaults by either party
This clause defines what constitutes default (i.e., late rent payment by the tenant, failure to maintain the outside structures by the landlord) and the available remedies.
Not all leases include 24/7 access to the property. Businesses that hold irregular hours should pay attention to this clause and be sure the agreement works in their favor.
End of lease holdover
The typical fee for staying in the space after the lease term ends. These fees can range anywhere from 100 percent to 200 percent of current rent.
Insurance, indemnification, and liability
This section of the commercial real estate lease will lay out what types and amounts of insurance each party must hold. It will also cover which party is liable for a host of possible damages.
What Are Some Basic Fee Structures for a Commercial Property Lease?
Businesses in the Mid-Ohio Valley will likely see three different types of commercial property leases. Each provides a different way of structuring fees and allocating them between the property owner and the leasing party.
Triple Net (NNN)
A triple net lease, or a net lease, is one of the most common lease structures used for commercial properties. In this arrangement, the tenant pays the base rent along with the three additional “nets,” which include:
- Property taxes
- Building insurance
- Common area maintenance (CAM)
While it may seem as though the tenant absorbs the brunt of the costs, the landlord is still responsible for maintaining the structural components (structural walls, foundation, and roof) of the building.
To calculate rent for a NNN lease, take the estimated annual expenses and add that number to the price per square foot multiplied by the rentable square footage of the space.
Full-Service Gross (FSG)
A full-service gross commercial real estate lease releases the tenant from most expenses related to the property. The tenant will pay a base rent that changes only in relation to the agreed-upon rent adjustment clause. To calculate the rent for an FSG lease, you simply multiply the price per square foot by the square footage of the space.
Modified Gross (MG)
A modified gross lease allows the tenant and property owner to agree on a detailed breakdown of rent versus operating expenses. A tenant may be asked to pay for rent plus just the electrical bill or just the water.
What Additions are Commonly Made to Basic Commercial Property Leases?
Businesses in the Mid-Ohio Valley and across the country are facing huge disruptions related to real estate. Many employees are working remotely while some businesses are seeing large stockpiles of inventory that can’t be used due to supply chain issues. Business owners may find that they are leasing more space than they need.
This is where a sublet comes into play. A sublet will allow a tenant to rent extra space to a third party. Anyone leasing commercial property should find out what is and what isn’t allowed when it comes to a sublease.
Business owners may ask for an exclusivity clause in their commercial property lease. These are popular in retail leases since it keeps similar businesses from setting up shop in the same location. For example, a smoothie bar might want to ensure another smoothie bar doesn’t move into the same strip mall.
When leasing commercial real estate, a business’ rent can increase on a yearly basis or during any renewal options – this is what the rent escalation clause covers.
The rent escalation clause explains how much of an increase in rent a tenant will be subject to. Business owners should treat rent escalation like a homeowner would treat an adjustable mortgage. Calculate rent escalation through the long-term as even small percentage increases can compound lifetime lease costs.
Even the most basic commercial lease requires careful reading and a sophisticated understanding of commercial contract law. While this provides a basic foundation for your understanding, we recommend you always discuss potential commercial real estate leases with a qualified lawyer before making decisions.
For over 30 years, the PM Company has been involved in commercial real estate throughout the Mid-Ohio Valley. We help business owners find properties that benefit their business and provide leases with equitable terms for both parties. We currently hold a million square feet in commercial and retail properties throughout the Mid-Ohio Valley.
View our listing page for up-to-date commercial property listings including “For Sale” and “For Lease.”
Call us at any point in the leasing process and we will be happy to help you.
Contact us today for more information.