A commercial real estate lease provides a means by which property owners and business owners can control their property in a specific area without being financially attached to it. However, one of the biggest benefits of a commercial property lease is that it allows businesses to move into an area without any financial risk. While a commercial property lease may not be something you would consider right for your particular business, you will find that it is useful for others.
A commercial real estate lease provides a legal agreement between tenant and property owner that governs, amongst other things, how much rent is paid monthly and how the area can be used. The amount of operating costs that a tenant is legally responsible for depends on the kind of commercial real estate lease being used, which there are four. These include a base rental amount plus certain percentage of the gross receipts of the business, a pre-determined percentage of the annual sales of the business and the actual expenses incurred by the business, as well as certain payments to the tenant based on a schedule established by the tenant. If a business fails to meet these obligations, the landlord can legally evict the tenant.
One kind of commercial real estate lease has a base rental amount that is subject to increases as agreed by both the tenant and the landlord. This means that if the tenant’s annual gross sales decrease, they may be eligible for a decrease in the base rental amount. Also, if their annual gross sales increase, the tenant may be eligible to receive an increase in the base rental amount. A modified gross lease allows a tenant to pay a higher rent monthly and the landlord can increase the rent whenever the occasion arises.
Another type of commercial real estate lease has a net lease payment. This payment is made only when the tenant receives rent from the property and is not required to pay the expenses. Net leases usually have different provisions such as pre-determined deductions for operating costs. Operating costs are those expenses involved in maintaining the property that are not deducted from the gross receipts.
Full Service Leases: This type of commercial real estate lease has the highest profit margins. This is because full service leases provide full service services like paying taxes, insurance and maintenance, among others. Because the tenant does not have to personally pay for these, the landlord has more money. However, full service leases also have a higher rent. Landlords usually prefer full service leases over simple rentals because tenants tend to spend a large part of their monthly income on housing expenses. They are thus willing to pay higher rents.
Owner-Occupancy: This type of commercial real estate lease has a different structure from other agreements. The landlord is not a direct owner of the property but exerts authority over it through an exclusive right to occupy a certain part of the premises. This means that the landlord can set all the relevant terms of rent, which can include the base rent, incidental expenses, special assessment charges and the like. If the tenant fails to follow the agreements, he can be subjected to legal actions.
Base Rent: A commercial real estate lease normally includes a base rent. The base rent is the first amount that is paid by the tenant. It covers the cost of all utilities, which include water, electricity, gas, etc. Usually, the base rent remains the same throughout the duration of the lease.
Accidental Expenses: This is one of the most common mistakes made by tenants. They fail to include any of the necessary expenses in the lease. They either take on extra expenses without making sure they are covered or fail to make proper arrangements to cover for these expenses in case they arise. For example, they pay a deposit but fail to get the insurance cover on a damage-free basis, which could cost them a lot. Landlords usually have contingency arrangements for accidental expenses, which can be used to protect them in case of such occurrences.