If you have a commercial space that you are hoping to rent out, one aspect that you’ll want to pay close attention to when working to draw in potential tenants is the terms of your lease. There are a variety of different types of lease agreements that can offer benefits to you as the property owner or to your tenants. In today’s blog, we want to take a closer look at different types of commercial leases so you can get a better understanding of how to utilize a lease agreement to your advantage.
Different Types Of Commercial Leases
Leases come in many different forms, and knowing more about which type of lease may be right for your situation can help you boost your bottom line. Let’s look at some common lease types:
Net Leases - Net leases typically come in three standard forms. There’s a single net lease, a double net lease and a triple net lease. Let’s break those down further.
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Single Net Lease - Tenant is responsible for rent and property taxes associated with a property.
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Double Net Lease - Tenant pays rent along with property taxes and insurance associated with a property.
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Triple Net Lease - Tenant pays rent along with property taxes, insurance and maintenance associated with a property.
Oftentimes base rent is cheaper as the net lease type increases, meaning the tenant can save some money if they maintain the property and work to avoid the need for costly repairs. Many tenants also like the ability to make alterations or customize a space in a triple net lease as opposed to needing to purchase a property outright in order to have more control over the appearance of a commercial space. Net leases are also lucrative for the property owner as they can offload some of the burden of taxes, insurance and property maintenance.
Gross Lease - A gross lease is a standard lease where the tenant pays a fixed sum to the property owner on a regular basis in order to use the commercial space. Operating costs, insurance and maintenance are all baked into this rent price, so while it’s going to be a higher base amount, tenants don’t incur any unexpected expenses related to their rent each month. Tenants may prefer this peace of mind in a lease agreement, and property owners can charge more if they are willing to assume those other expenses and provide maintenance when needed. This type of lease also allows the property owner to more easily adjust the rent amount based on current market conditions.
Percentage Lease - A percentage lease requires the tenant to pay a base rent and then a percentage of gross revenue earned while doing business on the premises. This allows the tenant to have some flexibility in rental payments based on slow or busy seasons. Many tenants don’t mind paying more in rent when they have a strong month and appreciate the lower rent during slower periods. This type of lease can be beneficial for property owners who do their research and rent to successful businesses and tenants.
Month-To-Month Lease - A month-to-month lease provides tenants with a short-term opportunity that could turn into a longer rental situation depending on a number of personal factors. Start-up businesses may opt for a shorter month-to-month lease as they can’t guarantee the needs of today will be the needs of tomorrow, and many renters who are traveling for work or between housing prefer the flexibility of a month-to-month lease. These shorter leases can prove a little riskier for property owners, as higher turnover can lead to more vacancies, but the flexibility offered by these leases also allows landlords to charge more for rent.
Yearly Lease - Many businesses or housing units have their tenants sign agreements to a lease on a yearly basis. This locks a tenant into a commercial space for an extended period, guaranteeing passive income for months to come. This lower turnover makes for steady income, although the limited flexibility may discourage some potential renters, possibly forcing the property owner to lower rent amounts to attract new tenants when vacancies arise.
The right type of lease can increase the value of your commercial property and boost your bottom line, so choose wisely. For more information about commercial real estate and investing, reach out to the team at Commercial Partners today at (612) 337-2470.