Understanding Commercial Real Estate Leases

Scott Price | August 16, 2016

Client signing a real estate contract

Renting commercial space and negotiating a commercial real estate lease is a big deal and the success or failure of your business can be significantly impacted by the terms or conditions of your lease. Most leases are not based on a standard form or agreement, but are customized to the landlord’s needs. As a result, it’s important that you carefully examine the lease before you sign, and keep in mind that you cannot easily break or change it. It is a legally binding contract, and a good deal of money is usually at stake. Bottom line, not all leases are created equal, so it’s important to pay attention to the details.

Gross Lease

Chances are, if you are looking for office space in a multitenant building, you are more than likely seeking a Gross Lease or Full Service Gross Lease. While the definitions vary slightly, these types of leases generally make the owner responsible for the building’s operating expenses. With a Gross Lease, the rent is all inclusive. That means that the landlord pays all or most of the associated expenses – i.e. taxes, insurance, maintenance, repairs etc.

Some gross leases also include utilities and janitorial services. The key to negotiating this type of lease is to ask which services are provided and for a clear definition of what those services cover. However, that is not a one-size fits all approach. For example, if the lease covers utilities, it could also stipulate that excess consumption be charged back to the tenant. The definition of “excess” should be clarified, and it would be in your best interests to make sure that the covered amount actually covers your routine consumption. It’s important to note that even with a Full Service Gross Lease, you could also be required to pay a proportional share of any increases in expenses that the property may incur. Make sure that that possibility is clearly spelled out and acceptable to you before you sign.

Net Lease

If you are the only tenant in a building, the landlord may offer a Net Lease, also called a Triple Net Lease, making you, the tenant, responsible for operating expenses. According to Marcus & Millichap, the current demand for net-leased properties remains robust. In fact, to address limited space availability developers have worked to expand the pipeline of single-tenant floor plans, with deliveries topping 39 million square feet in 2015 in the retail sector alone. Competition for prime locations is fierce, which is why it is crucial that you go into a net-lease situation with a clear picture of what you need, and that you are armed with the right strategies for a successful negotiation.

Unlike a Gross Lease, a Net Lease makes the tenant responsible not only for rent, but for some of the operating costs of the building. The most common of those include:

  • Property Taxes – Tenants must pay their portion of property taxes, usually based on how much of the rentable space (or of the entire property) they are leasing.
  • Insurance – Liability, property and casualty insurance may also be allocated between the tenants and landlord.
  • Maintenance – Maintenance costs will more than likely also be negotiated heavily, with landlords wanting to “pass through” all costs to the tenants, while tenants want to get as many “exclusions” as possible.

When all three of these expenses are included in a net lease, it is referred to as a Triple Net Lease. Negotiating the terms of these leases is tricky, and you’ll want to know all of your options to help minimize your liability for expenses.

Bottom line, no two leases are the same, and terms are often subject to change. That’s why it makes sense to have someone working with you, and for you, throughout the lease negotiation process. At PlaceValue, we are standing by to help you get the lease and the space that will meet your needs now and in the years to come. As a leading independent planning, procurement and project management firm, PlaceValue helps our clients realize today’s high performance, adaptable work place, objectively and without bias. By aligning business workplace design with business strategy, managing the supply chain for maximum value, integrating project delivery, and leveraging our buying clout, we bring our clients immediate cost savings and long-term return on workplace investment. Our independence, world class process and pricing transparency, ensure the best possible outcome for your new workspace. Call us to schedule your free consultation today.

For more helpful tips about leases, download our report “Top 10 Things to Consider When Leasing Commercial Office Space”, full of eye-opening information that will help you navigate your own lease.