Today’s article is going to discuss the three main commercial lease types. It obviously takes a little more than that to know how to lease commercial real estate the right way.
However, knowing the pros and cons of the main commercial lease types helps.
The three main commercial lease types:
A full-service lease is the most common type of commercial lease for office buildings. The rent is all-inclusive with a full-service lease so the landlord is responsible for paying property expenses. Therefore, the landlord pays all the property taxes, insurance, repairs, and maintenance. They also pay the utilities and janitorial services. This is the best type of lease for the tenant because it helps the tenant avoid hidden or unexpected costs.
A net lease is a lease agreement where the landlord charges a lower annual rent compared to a full-service lease. However, a landlord can pass on other costs directly to the tenant. In this scenario, the tenant can be responsible for taxes, insurance, and CAMS. Net leases can be either a single, double, or triple net lease.
A single net lease means a tenant pays rent and a share of the building’s property taxes. In a double net lease, the tenant pays also pays a portion of the property insurance. The tenant pays a portion of the property taxes, insurance, and CAMS in a triple net lease.
These types of lease agreements provide a lower base rent for the tenant. However, the tenant is also responsible for the monthly cost associated with maintaining the property. These types of leases are the most landlord-friendly.
Modified gross lease
A modified gross lease is a compromise between the full-service and net lease options. With a modified lease, a tenant might pay for a portion of the additional expenses. However, it’s typically a lump sum payment along with the rent. The modified lease means there are no hidden or unexpected costs. The rent and lump sum payment stay the same no matter what extra costs come up.
The pros of leasing commercial real estate
There are many benefits to leasing commercial real estate including speed. You could theoretically sign to lease commercial real estate and move in within a day or two. There is no fancy closing process. You just need to pay rent and a deposit. Once you do that it’s time to get to open up for business.
Leasing commercial real estate is not necessarily a longterm commitment. You can always renegotiate or move much easier should the need arise. There are a lot fewer upfront costs when it comes to leasing commercial real estate.
You will have to spend some money to prepare the space for work. There will also be deposits required by the landlord. However, there is no need for a large down payment, appraisal fees, closing costs or possible repairs that come with buying commercial real estate.
It also tends to be cheaper to lease rather than own. This often makes leasing commercial real estate a wiser investment for business owners.
The cons of leasing commercial real estate
The flexibility and low upfront costs are nice, but there are also cons in leasing commercial real estate. Rent is dependent on market demand so that can work in favor of the tenant or the landlord.
If the demand for leasing commercial real estate in your market drops so does the rent. This means you could be paying more than the new tenant next door. If the demand is rising in your local market then you could see double-digit rent increases when it’s time to renew.
Even annual increases can leave you how to budget the difference in your business.
The risk with leasing commercial real estate
There is plenty of risk with leasing commercial real estate due to lease agreements and money involved. Continuity is also a risk when it comes to leasing commercial real estate. Having to update directories, social media platforms, business cards, and your customers due to a change of address is a pain, to say the least.
The more often you have to move the more hassle and confusion the address changes will cause. Your rent payments are also building equity for someone else. Long term leases can offer a tenant some protection.
There is always going to be plenty of reason to debate whether you should buy or lease commercial real estate.
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