If you are starting a business, you probably already have your plan, financial records, maybe even a loan, but now that it is coming down to logistics, this article should help you understand what type of lease your company should be looking for.
Commercial leases can be broken down into a few main categories. If you look more deeply into commercial leases you’ll find that there are some differences based on what type of property. The type of lease that you decide on, depends on a few things:
- What type of business you are running.
- What type of building you are leasing.
- What the landlord is offering.
So, let’s take a look at the type of leases that are available.
Full Service Lease
This is the first type of the commercial leases. Usually, this means that everything is included in the monthly lease amount. Everything means cleaning, maintenance, taxes, etc.
This is the most common type of lease because of its simple form. This type of lease is generally used in a multi tenant situation like an office building where different businesses lease the building. So if you are looking into leasing office space, this might be your best bet.
Probably the most negative thing about this type of lease is for example, if you are renting a warehouse for a certain amount per month, all amenities included, the owner of the commercial warehouse still has the right to increase any expenses on demand. During the winter, a warehouse would take a lot to heat up because of the high ceilings, so if utilities are included in the lease agreement and the electricity bill goes up significantly, the landlord can hold the tenant responsible for the difference. Usually, the tenant will receive a bill.
Triple Net Lease
This type of lease references properties that do not include the additional expenses mentioned above; utilities, maintenance, property taxes and insurance. These items are usually billed separately every month. Net leases are usually used in retail properties but do stretch to the same multi tenant properties mentioned above also.
The good thing about this type of lease is that the rent itself tends to be lower, so if you are careful about the other variable expenses each month, you can keep your monthly payments down. On the other hand, having those extra payments can be a bit of a headache. A lump sum tends to be easier to take care of.
Industrial Gross Lease
This can also be called a ‘modified gross’. It has become known more commonly as industrial because that is where it is most commonly used. The easiest way to describe this type of lease is as a full service lease with some extra expenses that are due at the same time as the monthly rent.
The pros and cons of these types of commercial leases are very similar to the triple net lease. Generally speaking, however, most industrial buildings do not need heating or cooling so that money can be invested in the security of the place as major product are usually left in the building at all times.
Percentage Lease
If you are leasing retail space, this may be a good option. This type of lease leaves the tenant as responsible for the monthly lease amount as well as a percentage of any income earned from the business.
For example, if a retail store is under a percentage lease, they may be paying $500 less than the fair value for rent but they are obligated to pay a percentage of their revenue to the landlord, such as 20% of all sales made for the month. So, if sales are good, they may end up paying more than the $500 difference, but if sales are bad for that month, they still only have to pay 20%, thus easing the burden a little bit during hard months.
As you begin your search, keep all of these types of leases in mind but also, remember that there are other types of leases available also, these are just the main categories that most other leases fall into.
