For many small businesses and sole proprietorships the opportunity to move into a brick and mortar office, or open that first store front, is a momentous occasion. It often takes months or years for a business to grow to the extent that renting space is realistic, and most owners are rightfully proud to reach this important milestone.
While moving into a new space can be cause for celebration, it also brings with it new challenges and financial commitments. Unless you are lucky enough to be moving into a space that you already own or that someone is offering for free, you will likely have to rent your space through a commercial lease. Although most owners are familiar with leases through residential rentals, commercial leasing is an entirely different beast.
Commercial Lease Options in Lakewood
After searching for space and working with brokers to find a location that fits your business needs, the discussion will often turn to the terms of your potential lease. Business owners will find that three different types of commercial leases exist:
- Gross Lease
- Net Lease
- Modified Gross Lease
The primary difference between gross leases and net leases is the way that payments are calculated by the commercial landlord. In most commercial lease scenarios, the tenant will pay a base amount of rent for the property itself. Then, based on whether the lease is gross or net, the landlord will calculate an additional payment for other operating expenses such as utilities.
It is important to remember that while the three options above are general categories of leases, your lease will be highly specific to the needs of your business and the interests of your landlord. After agreeing on a particular lease form, you will want to make sure to review your lease carefully. You need to ensure that it provides all the amenities you need and answers any questions that you have.
How Does a Gross Lease Work?
A gross lease is also defined as a full service lease, and can usually be identified by the fact that it requires the tenant to make just one lump sum payment. This payment will incorporate your rent, but also include money for taxes, utilities, maintenance, equipment, and any other specific costs associated with your space.
In a gross lease scenario, the landlord will typically take responsibility for paying these various expenses, including paying taxes and monthly bills, and will bill the tenant a flat rental rate that helps to cover these costs. The obvious benefit to this approach is that it is much simpler for the tenant and does not require the tenant to keep track of a variety of different expenses.
Likewise, if unexpected issues or costs come up – such as a dramatic increase in utilities or the need for significant maintenance – the tenant will not have to bear the burden of a sudden increase in rent since they are tied into a specific fixed rate.
That said, gross commercial leases do sometimes include provisions called escalation clauses, which allow the landlord to increase your fixed rate if certain events occur or if certain costs dramatically increase. Before you commit to a gross lease based on assurances that your rent will stay the same, make sure to carefully review the lease for these types of provisions.
The Net Option
Net leases are almost the exact opposite of a gross lease. In a net lease, the tenant will pay the landlord rent for the property, but then pay certain expenses such as utilities or maintenance directly. This results in a lower overall payment to the landlord, but potentially unpredictable variable expenses as well.
Four types of net leases exist. The first is the single net lease option, which require the tenant to pay rent as well as a portion of property taxes for the property, utilities, and services that the tenant uses. The landlord then covers any overarching building expenses (like a new roof).
The second type is the double net lease. The double net lease is similar to the single net lease, but requires the tenant to pay a portion of the property insurance as well a the property tax. The triple net lease requires that the tenant pay a portion of property insurance, property tax, and common area maintenance. This is one of the most common types of commercial leases.
Finally, the absolute triple net lease is where the tenant essentially takes over all costs associated with the building they are operating out of, almost as if they own the building themselves.
Net leases can be beneficial to tenants who want to have greater control over the amount they pay, or have certainty that they are only paying for a portion of utilities or services they actually use. If the tenant uses less utilities, they will pay less, whereas with a gross lease the amount will stay the same.
Some commercial tenants also prefer net leases because they give the tenant more control over the property and reduce issues in dealing with landlords. For example, landlords under a gross lease may be more reluctant to address maintenance issues because they are not compensated any more for doing so, while a net lease just allows the tenant to address those maintenance issues directly.
Best of Both Worlds? The Modified Net Lease
Finally, the modified net lease (also known as the modified gross lease) is a third option which can be used by tenants to negotiate an ideal fit for them. Under this arrangement, the tenant pays a fixed rent to the landlord, but has the ability to negotiate what expenses will be covered by that fixed fee.
The tenant may argue to have certain expenses included or excluded based on the nature of business, or to take greater control over certain aspects of the renting process. The landlord and tenant then agree on the expenses to be covered by the fixed rental amount, and what that amount should be.
Washington Real Estate Lawyers That Can Go Over Lease Options With You
If you’ve recently started a new business and are getting into the world of commercial leases for the first time, the options to consider and the details of those options can be overwhelming. Because commercial leases have the potential to impact your business revenue immensely, they require special attention and scrutiny.
At Blado Kiger Bolan, PS, our real estate attorneys are familiar with many of the real estate brokers around town, and the various types of leases offered by those in the industry. We can help you formulate a strategy before beginning to look at commercial spaces, or review your lease before signing. To find out more about the services we provide, contact us online or at 253-272-2997.