Commercial Lease Types and Basic Tips for Negotiating Terms
Whether you are a new investor in the commercial investing field, or an old pro, it is important that you understand the different types of commercial property leases so that you are equipped to negotiate the very best terms possible. You need to fully understand each type of a commercial lease, the language you'll encounter, and learn the best tips for getting the terms that you want. Today there are a variety of different possibilities when it comes to commercial leases. While you'll find that residential leases are fairly cut and dry, commercial leases are not. When it comes to commercial leases, there are a variety of options and several different types of leases available. If you take a look at a lease on a suburban shopping center, you'll find that it is worlds apart from a lease on an office that is located in a large city. You'll find that there are several different types of leases you need to be familiar with; however, even within these categories the leases can vary too. The following are a few key types of leases you need to familiarize yourself with and understand as well as possible.
Gross Lease In this type of a commercial lease, the tenant is required to pay rent that is set, but then the landlord has to pay for insurance, taxes, and any other costs that come along with owning the property. This is totally opposite of a net lease.
Net Lease The opposite of a gross lease, a net lease requires that the tenant pay not only the rent, but also some of the operating expenses, like insurance premiums or maintenance costs. If you happen to take over a building that has gross leases, you may want to make a move towards net leases, which will provide you as the owner with more profit.
Land Lease This type of commercial lease is also known as a ground lease, and this is where the tenant leases the land and then builds on it. Usually at the end of this type of a lease the entire property, including all the improvements and any buildings go back to the owner of the property. This is a great way to generate cash if you are investing in commercial property.
Triple Net Lease This commercial lease is much like a net lease; however, it requires that the tenant pays for all the operating expenses and fees that come with the property and buildings, which makes it a great choice for owners.
Step Lease Another type of commercial lease is the step lease. In this type of a lease, every year the rent is increased by a set amount during the life of the lease. This can help to cover the increase of expenses that the landlord expects over the years.
Shopping Center Lease This commercial lease requires that the tenant pay a base rent that corresponds with the size of the facility. Usually the tenant will also pay common charges and often a percentage of their gross sales as well. Tenants may also have to pay some of the property tax too. Many times these leases include specific terms about deliveries, signage, operational hours, and the common areas.
Cost of Living Lease This commercial lease increases the rent based on the cost of living. Basically with this type of a commercial lease, as inflation goes up, so does the lease.
Master Lease A master lease is a type of commercial lease that controls other leases. It can cover more property even when a lessee subleases part of the property. In other words, if a person leases an office building and then sub leases out each office, the subleases are still covered by the master lease as well.
These are just basic guidelines when it comes to commercial leases. Within each type of these common commercial leases, there can be many variations as well. However, knowing the basics is important before you start working on leases.
Of course, not only do you need to understand the leases, but you need to know how to negotiate terms as well. As an investor and landlord you will want to look for longer term leases that will provide you with guaranteed income for a longer time period. You may also want to go for a lease that provides for rent increases, to make sure you can still make money even if costs go up for you. Also, consider seeing if the tenant will make improvements that are needed, so you will benefit from them without actually paying for them. Keep these tips in mind as you negotiate the best terms possible for your commercial lease.
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