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Types of Leases

Small-business owners moving into the world of commercial leases may notice some unusual terms in their lease agreements. There are different types of lease agreements, different lease options, and differing lease terms to consider. Business owners need to understand the meaning of all these terms and their implications when leasing commercial property.

When you review a commercial lease, you should have a business attorney nearby to explain anything you don't understand. Commercial lease agreements, like any legal document, contain jargon and language unique to real estate, and you don't want to sign anything of which you're unsure.

Common Lease Terms

Some common lease terms in any lease agreement involve common areas and state and local laws. Be sure to read these clauses, though. There may be as many legal disagreements over who is responsible for the kitchen area as over office space.

  • Base rent: The listed rent based on total square feet of the space
  • Building insurance, also known as property insurance: Insurance paid on the entire property
  • Common area maintenance (CAM): Cost of upkeep for lobbies, hallways, kitchens, etc.
  • Full-service lease: The landlord pays all maintenance and other costs
  • Janitorial services: Cleaning and upkeep of the building
  • Lessee: The party renting the facility
  • Lessor: The landlord
  • Long-term lease: A lease of more than five years
  • Maintenance costs, also known as maintenance expenses: Costs of repairing, cleaning, and maintaining the entire property
  • Operating expenses: Costs of running the property, such as utilities, staff expenses, etc.
  • Property taxes: Taxes for the entire commercial space
  • Short-term lease: A lease less than five years, often less than three years

The landlord may incorporate these costs into the base rent or add them to the rent. The lessee should ask what costs they are paying and what the base rent includes. A lower base rent often means paying for some of the maintenance costs yourself. If you're not sure, ask for clarification.

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Types of Leases

There are nearly as many types of commercial leases as there are types of commercial properties. Your lease should reflect your business, the space, and your cash flow. Lease payments are usually negotiable, especially in net leases. These are a few of the most common lease types:

Flat or Fixed Leases

  • A single rent is set for a definite period of time.
  • Fixed leases are uncommon for commercial real estate.

Gross Leases

  • The tenant pays the base rent.
  • The landlord pays all operating costs for the building.
  • In some cases, the tenant pays for their own utilities.
  • Gross leases may contain an escalation clause allowing an annual percentage increase to offset costs. Business income or the federal price index may set the lease increase.
  • In a modified gross lease, the tenant pays the base rent and a portion of the operating expenses.

Step Leases

  • The rent increases at a set amount each year during the life of the agreement.
  • The increase is meant to cover the landlord's expected increases in expenses.
  • Estimated costs increase the rental amount.

Cost-of-Living Leases

  • The rent rises based on the cost of living.
  • The rent goes up with general inflation.
  • Cost-of-living leases are nearly always used for residential leases.

Net Leases

  • These are also called single-net leases.
  • The tenant pays a base monthly rent plus the taxes, insurance, or maintenance costs.
  • Actual costs, rather than estimates, increase the rent amount.
  • The rent goes up when the landlord incurs an increase in costs.
  • If leasing only a portion of the building, the tenant will pay a proportionate share of the taxes.

Net-Net Leases

  • These are also called double-net leases.
  • The tenant pays the base rental amount plus any two of the taxes, insurance, or operating costs.
  • The insurance and real estate taxes are proportional to the occupied space.

Net-Net-Net Leases

  • These are also called triple-net leases.
  • The tenant pays the base rental amount plus taxes, insurance, and operating costs.
  • A triple-net lease is also called a pass-through lease, since the landlord's costs are "passed through" to the tenant.

Percentage Leases

  • The tenant either pays a base amount and a percentage of gross income or, depending on which is higher, pays a base amount or a percentage of the business's gross income.

In any lease agreement, the terms of the lease will control whether there is a legal issue, so you should have the agreement reviewed by an attorney before signing. The three types of net leases can vary depending on which of the operating costs the tenant must cover. These costs are negotiable, and in most cases, the landlord expects to negotiate. Never accept the landlord's first offer on a lease agreement.

If you need more information, visit our Small Business section.

Let an Attorney Help You With Your Business Lease Concerns

Real estate leases are important for any business, startup or established. You need an attorney who can explain what you're signing and how it will help your business. Contact an experienced business law attorney in your area to negotiate your lease and help start you off on the right foot.

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