Most business owners at some point become tenants.

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Here are some Advantages to Leasing

You will have the ability to move to another property upon your lease expiration. Leasing may free up capital so that you can use it to hire more people or upgrade your equipment, etc. Leasing in a prime location may be easier and more cost effective than buying in a prime location. Lease payments are tax deductible.

 

Disadvantages to Leasing

Upon your lease expiration, your landlord may substantially increase your lease rate. The property can be sold, and the new owner may not be as accommodating as your previous landlord. You may need to obtain the landlord’s permission before you do any type of improvements to your space.

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There are different types of leases

 

Gross Leases

A gross lease is a type of lease in which the tenants pay rental payments only. The landlord pays all of the costs for operating the premises—CAM fees, utilities (water, electricity, heat, A/C), property taxes and special assessments, insurance premiums, and other costs associated with operating and maintaining the property. Leases can be "full-service gross," "industrial gross," "modified gross," or another variation.

 

Net Leases

In addition to the monthly rental payment, a net lease requires the tenant to reimburse the landlord for a portion of the basic property expenses, such as maintenance, taxes, and insurance. This gives the landlord a better idea of the monthly cash flow from a property, because the tenant has the burden of paying these expenses. The expenses are usually calculated on a base year. Net leases are categorized as a single net (N) lease, a double net (NN) lease, a triple net (NNN) lease, or an absolute net lease. With each type of net lease, beginning with the single net lease, additional expenses are added to the tenant’s obligation. Because there is no standard division of expenses between the landlord and tenant in net leases, it is important to state which expenses are the obligation of the tenant in the lease. Generally, in a single net lease, the tenant pays the monthly rent plus property taxes (including any special assessments on the property). In a double net lease, the tenant pays property taxes and insurance premiums. Various forms of net leases are used for commercial leases. In a triple net lease, the tenant reimburses the landlord for CAM fees, property taxes, insurance costs, and, sometimes, structural repairs. Triple net leases are often used for industrial properties, retail properties and sometimes even office properties. An absolute net lease requires the tenant to pay for all the expenses of operating and maintaining the property, including major repairs and any capital expenditures. An absolute net lease is used when the tenant is the only tenant in the building. For example, a restaurant or an office building occupied by one tenant may have an absolute net lease.

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Percentage Rent

Percentage rent leases are typically seen in retail stores and restaurants. This type of lease states that when a tenant's sales exceed a predetermined amount (called a breakpoint), the tenant will pay additional rent.

 

Index Leases

An index lease charges a base rent and includes an escalation clause in the lease that provides protection against inflation for the property owner. The escalation clause ties rent increases to a selected reliable index, such as the Consumer Price Index (CPI). The Consumer Price Indexes (CPI) program produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services. The Bureau of Labor Statistics of the U.S. Department of Labor provides the CPI (www.bls.gov/cpi).

 

Measuring Space

It's important to know how much you will be paying for leased space. Here are a couple of the most common ways of measuring space:

 

Rentable: Rent may be quoted based on "rentable square footage," which means that there are areas of the building that are shared by other tenants. As a tenant, you will be given the responsibility of paying for your share of that common space (also known as "common area operating expenses").

Usable:  Usable area is simply the space a tenant is actually occupying.

 

Length of the Lease

Commercial and industrial leases are usually for a minimum of 2 years. Five-year leases with renewal options are also common for commercial leases. Commercial tenants generally prefer leases for 2 to 5 years because they want the security of remaining in the same location. Businesses have stationery, phones, an established location, and many other items that make it expensive to relocate. Industrial leases are very long leases and average between 10 and 20 years with renewal options. Industrial businesses are the most expensive to move, which makes industrial tenants very unlikely to relocate at the expiration of a lease term.

 

Consider engaging a tenant representation broker

A prospective tenant may want to engage the services of a broker in order to obtain proper market knowledge. A good broker will read through your lease a couple of times in order to catch anything out of the ordinary, such as lease clauses that can negatively affect your business, and might be able to negotiate a better deal for you because he or she may know prevailing market rates. A broker may save you time and effort because he or she will do most of the legwork. In most leasing situations, the LANDLORD pays your broker a leasing commission.