How Does a Retail Lease Work?

Lease Terms

There are several different types of leases you should know about when signing a retail lease. These determine what you pay in addition to the rent listed on the advertised rental rate. The triple net lease is the most expensive for the tenant with him having to pay all taxes, insurance and maintenance costs for the property while leasing it. The opposite of the triple net lease is the gross lease, where the landlord pays for taxes, insurance and maintenance. The tenant only pays the listed rental rate. Advertised rental rates are lower with the triple net lease due to the tenant having those extra expenses in addition to the rent compared with a gross lease.

In between a gross lease and a triple net lease is a modified gross lease. This specifies what the tenant will pay and it is typically a utility. This can be expressed as a modified gross plus electric lease, in which the tenant pays the electric bill in addition to the rental rate. Another example would be modified gross plus taxes, where the tenant pays the rental rate and property taxes for the rental space.

Escalations

As a retail tenant, your lease will indicate how your rental rate changes over time. There can be a percentage lease, where it will go up a certain percentage each year. There can also be lease where the rental rate increase is based on the cost of living adjustment calculated by the federal government. A more complex one is where the increase in rent is based on your increase in net sales from year to year. All of these increases can have a maximum limit so a tenant can note the most he will have to pay in a given year.

Tenant Improvements

Not all leases are created to add costs onto the tenant. Some will include what is called a build-out or tenant improvement. This will give the tenant a certain amount of money, usually expressed in an amount per square foot that the tenant is renting that he can use to have the landlord improve his rental space for him. Tenant improvements can be expressed such as TI of $3 per square foot. What this means is the tenant can multiply the square feet he is leasing by $3 and use this money to ask the landlord to build additional items for the space he is leasing. An example would be to add in additional restrooms for a restaurant or new ovens. The tenant improvements are completed before the tenant moves into the rental space.