Understanding the lease - part five
Highlighting where we have been, in part one we compared a lease to a month-to-month rental agreement and what happens when your lease expires.
Part two defined the commencement date and why you should pay your rent on time if not early.
The use of the security deposit, property condition and maintenance was highlighted in part three.
Part four explained how to handle repairs and alterations, the landlord entering the premises, subletting and terminating a lease early.
I promised you we would be discussing the commercial lease, which we will start to do in this article. Fortunately, as I highlighted the major points of a residential lease, this laid the groundwork for the commercial lease because most of the terms are common to both.
The forms used
Just as there are several residential lease agreement forms available the same is true for commercial leases. In my locale, the majority of leases for most of the property types I handle use the 19 page (usually ends up being 31 or more pages) AIR CRE forms. CAR (California Association of Realtors) does offer a six-page commercial lease but is only suitable for basic properties when only a simple lease is needed.
In addition to the AIR CRE forms used the next common are custom leases drafted by attorneys. These leases can be complex covering many details and can amount to a hundred pages or more.
Types of commercial leases
There are several different lease forms used dependent on the property type, use, and financial structure. Gross, modified gross, industrial gross, single/double/triple net, percentage rent, and full-service leases each has their nuances that can also be subjective depending on the landlord.
The gross, modified gross and industrial gross lease are each similar to each other in that a base rent is paid along with some form of reimbursement of expenses to the landlord. The reimbursement can be an increase in the property taxes and insurance each year.
Additionally, there may also be a common-area-maintenance charge, which is a fee to reimburse the landlord the expenses for maintenance, landscaping, water, garbage and management fees prorated based on the size of your unit.
A single, double or triple-net lease is similar to a gross lease with a common-area-maintenance charge, but the tenant also reimburses the landlord a prorated share of the entire property taxes, insurance or both.
The percent rent lease has the tenant also paying the landlord an additional amount of rent over the base rent. The amount of percentage rent is calculated by taking an agreed to percentage of gross sales of the tenant. These leases are commonly used in shopping centers.
Lastly, a full-service lease only charges base rent. There are no additional expenses to be reimbursed to the landlord. Additionally, this lease could also include utilities, garbage, Internet, cleaning, and even supplies in the shared kitchen. These leases are often used in an office building or executive center.
In my next article, we will discuss some of the specific terms to one of the commercial leases.
Burt M. Polson, CCIM, is an active commercial real estate broker. Reach him at 707-254-8000, or firstname.lastname@example.org. Sign up for his email newsletter at BurtPolson.com.