Significant restoration clauses (i.e. removal of tenant cabling post lease)
Majority of Tenants represented by third party provider (commercial brokers)
Residential Leases
More consumer protection laws
Standard forms
Not as much negotiability and flexibility
Nominal securitization required
Majority of Tenants unrepresented by third party provider (residential brokers)
Commercial Lease Types
Retail
Office
Industrial
Basic Lease Cost Determination
Monthly cost determined by multyplying square footage by the cost per square foot
CAM
Taxes
What Are Commercial Lease Types?
GROSS LEASE
The landlord pays for utilities, insurance, taxes, and repairs.
Rent is usually higher with this type of lease because many of these costs are included, but the tenant will pay the same amount each month.
The payment of utilities is on a case by case basis, typically the responsibility of the Tenant.
NET LEASE
The tenant pays the rent amount and pays for utilities, insurance, taxes, and repairs.
Tenant pays for rent and taxes (100% assessed). In both scenarios, Tenants usually pay for their own utilities.
DOUBLE NET LEASE
The tenant pays the rent amount and pays the landlord for insurance and property taxes.
Tenant pays for rent, Property Tax, and Property Insurance.
TRIPLE NET LEASE
The tenant pays the rent amount and pays the landlord for the cost of utilities, insurance, taxes, and repairs.
The tenant is responsible for rent, building insurance, taxes, all common area repairs and maintenance.
This type of commercial lease is usually seen in commercial free standing buildings and retail leases.
Other Important Terms
Repairs & Improvements
It is important to note who takes on responsibility for removing improvements to the demised premises upon expiration of the lease.
This can be costly and sometimes can be a surprise to tenants.
Rent & Rent Increases
Short-term vs. long-term
Comparables
Incentives
An annual rent increase clause is typical and normally based on a percentage or determined by determined rent increase/”bump”.
Percentage Rent
In many retail leases, Percentage Rent is paid in addition to a fixed minimum rent
Percentage Rent is calculated as a percentage of the Tenant’s gross sales
Generally, the Percentage Rent kicks in when the Tenant’s gross sales exceed a minimum sales volume breakpoint amount
Term Option
Bargain for a short initial lease with the option to renew.
Landlord may ask for higher rent and possibly a fee. Landlord will provide less construction improvement allowance to Tenant.
If the landlord will not agree to a short initial term, consider negotiating for an early termination option exercisable by tenant for payment of a termination fee.
Exclusivity & Radius Clauses
Retail clauses
Exclusivity allows the Tenant to monopolize certain categories (i.e. groceries or coffee)
Protects Tenant’s investment and diversification of tenant mix
Radius clause benefits Landlord in ensuring that Tenant will not compete with itself within a certain radius of the store
Co-Tenancy Agreements
Provides for penalties or rent reductions in case a specific tenant leaves or overall occupancy drops below an acceptable level.
Helps to get retail centers leased when occupancy levels are low.
Protects smaller tenants in the event that an anchor tenant leaves.
Personal Guarantees & Security Deposit
How common in the local area?
How common by the landlord?
Other options?
Consider negotiating for a reduction/elimination of a security deposit/letter of credit/guaranty over time based on tenant’s compliance with the lease
Tenants should negotiate for a cap on the guaranty
Tenant personal guarantees are typical for companies with a low credit score, those that might be coming out of BK. Many times a Landlord will push (not always successful) for a subsidiary to have the lease backed by the parent company. For small offices, S-Corps, LLC’s, Law Firms, Landlord will push for personal guarantees. I have had less than 2% of my clients sign personal guarantees in 13 years.
How common by Landlords- not typical at all. During the last economic hit, the roles somewhat reversed, Landlords were being asked to provide financials and place all commissions, tenant improvement dollars into Escrows prior to Lease execution. We are seeing less and less of this.
Subleases & Assignments
Ask for the right to sublease or assign the space.
That way if business fails or you decide to move, you can easily leave without financial hardship and breaking the lease.
If the lease contains restrictions on assignments, tenants should make it clear that transfers of interests in the tenant and changes in control, such as in the context of a merger or acquisition do not require the consent of the landlord. These may be difficult to do in some circumstances but can be important in the future.
Differences Between Commercial Leases & Residential Leases