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Commercial Leasing
So, you're a landlord who has been renting
apartments for five years? You've established yourself in residential
leasing and are ready to move on to bigger and better properties. Why
not try the commercial sector with commercial leasing? In this article,
I will address the differences between a residential and commercial
lease, the various types of commercial leases and the terms to remember
when drafting your lease. To refresh your memory, commercial property is
classified as business property, retail strip centers, office space,
shopping centers, hotels, theaters and parking facilities, to name a
few.
The steps to purchasing a commercial
property are similar to residential, in that
it's advisable to locate a
real estate agent who is well versed in commercial real estate. It is
important to know what the space is zoned for, as this will determine
what type of businesses can occupy the space. For example, not all
commercial space can be used by restaurants. With the help of a
qualified agent, refer to the deed and seek legal counsel to identify
this information.
As with typical leases,
there is a lessor and lessee. The lessor, or the landlord, is the owner
of the real estate and the lessee is the tenant. Not all parties of the
lease are one person. Some are LLC's, corporations, partnerships,
co-tenants or co-owners. It's important to identify exactly who owns or
is leasing the property for legalities. A commercial lease is a
rental agreement that allows the lessee to legally occupy a given business
space from the lessor for a monthly fee. The lessee does not build equity in
the property, have an option to purchase the space at the end of the lease
term, or pay principal and interest.
Residential vs. Commercial
Like residential leases, a
commercial lease can be negotiated. Since the space of most businesses will
likely need to be changed, the terms will need to be negotiated. Unlike
residential leases, these types of leases reach from 10-50 pages and are
extremely complicated with their jargon, addendums, terms and clauses.
Generally, a commercial lease protects both parties by documenting all of
the agreed terms of the occupancy, responsibilities, obligations and facts
in writing. In many instances, the lease is drafted by an attorney or the
landlord's solicitor, who has the landlord's best interest covered. There is
no “standard” commercial lease used for this industry. Instead, each lease
caters specifically to each circumstance. As the landlord, you should take
advantage of this when drafting the lease. Most tenants have no idea what
commercial leasing entails and do not take the time to seek an attorney, nor
read the lease carefully. While I am not encouraging taking advantage of
your tenants, this is a bi-lateral, legally-binding business arrangement and
your goal is to make a profit above your expenses. Any unscrupulous activity
will be documented and shed an ugly light in terms of your reputation in the
commercial sector.
Additionally, depending on
the commercial rental market, negotiating the terms of the lease can take
from several weeks to several months. Thus, it is imperative for a lessor
and lessee to agree to the terms prior to signing the lease. You don't want
your tenant to find a loophole and somehow get out of their lease, leaving
you with a vacant spot and no income. It is wise to take preventative
measures and anticipate any future problems.
It should also be noted
that other than a few basic provisions applicable to retail leases, the
Government has chosen not to regulate or control the terms of commercial
leases. Thus, there are no consumer protection laws that rule commercial
leases (i.e no caps on deposits or rules protecting tenant privacy).
Types of Commercial Leases
So, now you have decided to
purchase commercial space and locate tenants. What type of lease will you
have them sign? As a tenant, their commercial loan terms are based on what
type of lease they sign. So, be sure to seek legal advice and to think about
what type lease makes most sense to you. Here are some of the most common
leases to consider:
- Gross Lease - rent
includes utilities, repairs, taxes and insurance (much like a residential
lease).
- Net Lease - fixed rent
plus a portion of the landlord's operating
expenses, including
maintenance, building insurance, taxes and utilities.
- Double Net Lease - rent,
plus taxes and insurance (lessor pays for
maintenance).
- Triple Net Lease - rent,
plus property taxes, insurance and
maintenance.
- Percentage Lease - rent
is determined by a portion of the lessee’s net income or gross profits
(typically used for large retail operations).
Drafting a Lease
As with any new business
venture, you should establish your team of advisors, including an attorney
and property manager. Locate an attorney who specializes in real estate law.
Their roles and responsibilities should be defined early on as to avoid any
confusion. For example, who will be the negotiator? You or the property
manager? After that, issues such as rent, maintenance, improvements and
expenses need to be discussed and defined when working with the potential
tenant. A letter of intent is optional to secure an offer to lease.
As the owner of the
commercial space, it's important to draft the lease in your best interest
and you must decide on several factors - type of lease (Gross, Triple Net,
etc), length of lease (short-term or long-term), rental amount, etc. While
short-term leasing may give a business more flexibility, that business is
not obligated to renew at the end of the term. In turn, you may lose
business. In that case, subletting may be a consideration to recoup costs.
On a positive note, if you foresee that a business in your building or
complex will be successful and profitable, you may want to include an
increase in rental payments when they come up for renewal.
When a lessee is interested
in renting a space in your building, there are several factors that they
will consider:
§ Parties to the
contract.
§ Rental amount (as well as security
deposit and circumstances and method of return), term, extension, method of
computation, frequency and allowable increases.
§ Type of Lease - does the rent cover
utilities, taxes and maintenance or charged separately?
§ Length of lease
and whether there's an option to renew.
§ Insurance.
§ Permitted use
and access.
§ Location, actual
space rented, common areas that are included.
§ Is special
zoning required for the business?
§ Specifications
for signs and their placement.
§ Improvements -
who will pay and own them upon termination of lease?
§ Maintenance and
repair of premises.
§ Whether
subletting or assignment is allowed.
§ How disputes are
handled (court, mediation or arbitration).
§ Equipment
leasing.
§ Responsibility
of HVAC system (heating-ventilation-air conditioning).
§ Federal, state and local requirements
(i.e. Occupational Safety and Health Administration), hazardous material
disclosure or the ADA (Americans with Disabilities Act) compliance.
As a lessor, you're
responsible for calculating various costs including Common Area Maintenance
(CAM) and taxes. Luckily, there are several real estate software packages
that can assist in generating monthly reports, termination dates and options
to renew documents. It's critical to your bottom line to invest in an
accounting system and/or leasing software to expedite your outsourcing fees
and staff.
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Kellye Fox is a Realtor®
with Property Consultants Realty in Chicago. She can be reached via e-mail
at kfox@propertyconsultants.com or at 312-492-3234. |
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