Renting a commercial property for your business involves several careful steps. Over the past few weeks, we’ve discussed the differences between commercial and residential leases. In addition, I’ve explained how to identify some general features of a lease that may be presented to you.
Now we’re at the stage where you must examine specific provisions in this contract to ensure that they meet the specialized needs of your business.
Remember that every provision can be negotiated between you and the landlord. With this in mind, let’s start by examining the most important aspect of your business lease: the rent.
Calculation of Rent
Unlike a residential lease, a commercial lease can require a tenant to pay for more than just basic rent (“Base Rent”) and utilities. Indeed, commercial leases typically pass through to the tenant one or more of the following 3 major operating expenses of the property (“Property”) in which your business would be located: (1) Real Estate Taxes; (2) Property Insurance; and (3) Common Area Maintenance.
A commercial lease that includes one or more of these expenses as “Additional Rent” is referred to as a “Net Lease.” Logically, if the lease seeks 2 of these expenses, it is referred to as a “Double Net” Lease and if the lease includes all 3 of these expenses it is referred to as a “Triple Net” Lease.
While a landlord will always prefer to pass through to you as many of the 3 expenses as possible, the appropriateness of such pass-thru is actually dictated by market factors, and the condition and location of the Property. Specifically, the stronger the economy and the better the neighborhood, the more likely that some type of “Net” lease will be appropriate. Also, the physical condition of the Property will dictate how many of the 3 expenses can be passed thru by the landlord. New buildings (Class A) typically require a Triple Net Lease, while renovated or newer buildings (Class B) only warrant a Double Net Lease, and older buildings (Class C) only can command a Net Lease.
Now, be mindful that I am providing this information to you as a guideline, since the type of lease to which you agree is ALWAYS NEGOTIABLE. Indeed, nothing is written in stone, and often which type of lease is appropriate will be unclear due to conflicting circumstances, such as when a new building is constructed in an older neighborhood or when the Property is old but is in an area in which almost every other property has been renovated. Also, the extent of the pass-thru can be limited by negotiating for a “cap” on the expense or by agreeing only to be responsible for the cost increase of an expense, rather than the underlying cost itself.
Needless to say, you should never enter any kind of negotiations with your landlord concerning the issue of rent, until you have done your homework concerning the type of lease and the rental rate that is present in the commercial neighborhood where the Property is located. Also, I strongly recommend that you have an experienced, knowledgeable real estate attorney be the person who negotiates the rent (and other lease provisions), rather than you. This arrangement will allow for your attorney to be the “Bad-Cop” and will also provide him/her with better negotiating leverage than if he/she is brought in to “un-do” terms to which you may have already agreed.
Next time, I will address another essential commercial lease issue: the proper way to calculate the square footage of your leased space.