Is a commercial lease the same as paying rent for an apartment?
No, when you rent a place to live in, you pay rent monthly based on a negotiated fee, as well as other fees as decided by the landlord, mainly first and last. You are also protected under the relevant government regulations, as well as a rental agreement eg. no pets.
In a commercial lease, you negotiate terms and conditions, which include the space you are considering leasing for a period of time, starting with a minimum of a year and then for as long as you can negotiate a mutual term. The longer the term, the better protection for you, but the higher the liability if you need to move.
See below for more, but generally, your lease is governed by a lease, which is a contract with terms and conditions agreed to by you, and the landlord. There is no tenancy branch. Only lawyers and a judge if there is a dispute. (See working with the landlord or property manager)
What do I need to know about negotiating a lease?
Commercial leases can be as simple as I want to rent that space, and the landlord quoting you an rental amount and then gives you the keys. Or they can be complicated requiring months of negotiations through a legal team.
If you are opening up a retail store, you will be investing a lot of money building up a customer base, a brand and in doing so, any change in location may very well damage your business.
When looking at a space, you will need to understand your needs, not only the day you want to open your business, but 10 years down the road. What other businesses are near that could complete with yours. Does the landlord have a completion clause in the lease preventing other services or businesses from doing the same as you right next door?
When considering how much you want to pay, remember, the landlord is not a charity. They want a return on their investment, but an empty space is not providing them with any income. This may be preferable, or the landlord may be very interested in having a new tenant, any tenant so long as they pay.
A lease can be as simple as a gross lease, or some type of cost sharing lease where you will be required to pay a portion of the expenses that are controlled by the landlord. Some expenses may be property taxes, management fees, Common Area Maintenance fees such as landscaping, snow removal, window cleaning, security, janitorial and garbage pickup. This is in addition to other rent that you have negotiated such as a base annual square foot rate.
What’s the difference between a gross lease and a triple net lease?
As mentioned in the previous question, a gross lease is a lease with a single rent payment due each and every month over the period of the lease. The landlord will estimate costs to operate the building and build that into the rent payment. The benefit for you is a predictable amount you have to pay and makes for easy budgeting for your business.
The landlord may win, or lose with this type of lease because if expenses increase during the term of the lease, the landlord will have no way of recovering and will be losing money.
The benefit for the landlord is less paperwork.
A NNN or triple net lease is a type of lease where you negotiate a base rate, with, or without an acceleration clause. An acceleration clause determines increases in rental amounts over the term, usually every year and is designed to allow you to build your business. A reduced square foot cost, and therefore, a low monthly rent is offset over the term by sharing in your success and raising your base rent over the term to meet or exceed predicted market rents near the end of your lease.
That’s the base rate. That’s the revenue the landlord, or property owner will get to provide a return on their investment.
The other costs, the more variable costs are calculated is what is typically called triple net and may or may not include various operational costs, including building improvements like paving the parking lot.
Be sure to ask what is included in triple net costs and how it is calculated?
One method is to use total rentable square feet, which may also include the space the walls take up that divide your space from the next one. That number is then used to calculate the cost per square foot of any operational costs to provide you with your rented space that is not covered by your base rent. Theses costs can include:
- A management fee. If the building is managed by a third party, they will charge a fee. That fee will be paid by you.
- Common Area Maintenance (CAM) is a fee that should cover things such as cleaning, painting, repairs, security, new carpeting, cleaning, repairs on HVAC systems and other mechanical systems in the building.
- Property taxes and building insurance.
Generally speaking, you will be getting the benefits of what happens around the building you are renting. Why not share in that cost?
The benefit to the landlord is that they will be freed from having to absorb variable costs if their calculations are wrong, the downside for you, is you will have little control over these costs and will share in the operational risk of the building. However, the one benefit is that the landlord or property owner is now available to provide a high level of service to you, the tenant because they are no longer hamstrung by paying an unexpected bill like a bad winter of snow removal.