When it comes to understanding commercial real estate leases, it’s not as easy as renting an apartment where the tenant agrees to pay the landlord a certain fee each month.
Commercial leases are more complex.
If you don’t fully understand what you’re signing up for, you could be in serious trouble.
Here’s one example of the endless number of mishaps that have left others reeling:
Let’s say you are renting a freestanding building to operate your jewelry business. Due to the tight real estate market for rental properties, your landlord requires you to sign a triple net lease.
After several years of operation, the building is struck by lightning and results in a fire, causing extensive smoke and fire damage to the building as well as the contents.
Unfortunately, you weren’t sure of the requirements of the lease and didn’t have insurance on the building. You are now personally responsible for covering all the costs associated with the damage and rebuilding of the property.
Back to reality.
The liability in this story could have shifted had you known there are three different types of commercial real estate leases: net, gross and modified gross.
These leases are organized by different rent calculation methods and may prompt you to seek additional insurance coverage.
Here are a few things to keep in mind about these leases before signing:
Net Lease
In a net lease, the rent is lower, but the tenant is also required to pay other expenses such as property tax, insurance, utilities, and maintenance.
Here are three types of net leases:
- Single Net Lease – The tenant pays base rent plus a share of the building’s property tax, utilities and cleaning services. The landlord covers all other expenses related to the building.
- Double Net Lease – The tenant is responsible for base rent plus a share of the building’s property taxes and insurance on the property. The landlord covers repairs and common maintenance for the building.
- Triple Net Lease – The most common type of net lease for freestanding buildings and retail space is the triple net lease. This type of lease is more landlord-friendly because the tenant pays all or most of the property taxes, insurance, and maintenance for the building. It’s important for tenants to carefully review the lease and associated fees.
Costs associated with a triple net lease can also fluctuate due to operating expenses making budgeting tricky for tenants.
Even though it doesn’t seem like it, there are tenant benefits with a triple net lease. Tenants have access to the operating expenses and can compare to what they are actually being charged. Monthly rent is typically less than in a gross lease as you, the jeweler, have more financial responsibility when it comes to the building.
Gross Lease
In a gross lease or full-service lease, the tenant pays one lump sum for rent and the landlord then pays expenses from that lump sum.
The landlord pays all or most of the expenses for the property including taxes, insurance, and maintenance out of the rent received from the tenants.
Before entering this type of lease make sure to ask how often janitorial services are provided and what types of services are included because excess consumption may be charged back to you, as the tenant.
This type of lease is very tenant-friendly as the landlord assumes responsibility for the building while the tenant can focus on their business.
Modified Gross Lease
A modified gross lease can be seen as a compromise between a gross lease and a net lease. Similar to a gross lease, rent is required in one lump sum.
It also has components of a net lease such as the tenant being responsible for property taxes, insurance, and maintenance.
The compromise is that tenants and landlords can negotiate what “net” components can be included in the base rent such as taxes, insurance, etc.
Takeaways before signing a lease
When looking at leasing options for your jewelry business, it’s important to:
- Compare the different types of leases.
- Keep in mind the extra expenses, not just the base rent cost.
- Work with an attorney to review the terms of a lease before you sign.
- If you’ve already signed a triple net lease or an absolute triple net lease, work with your insurance agent to arrange adequate limits of coverage.
The unfortunate circumstances of smoke and fire damage caused by lightning is only one example of how a lease can blindside your business.
If your insurance is lacking in other areas, you’ll likely run into issues elsewhere.
Whether you have a lease, are looking to move, or own your own building, there’s a Jewelers Mutual agent ready to help you to fit your needs.
