How to Understand Commercial Lease Agreements
Every tenant in a commercial building should have a lease. Understanding this document is crucial for every person or entity involved with the transaction. Tenants need to know for what they are responsible, as do owners. Property managers need to know what their duties are relative to both tenant and landlord, as well. Even investors need to understand leases, as their terms have significant impact on the value of a piece of commercial real estate.
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Instructions
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Understand the nature of the lease. If the lease is a full-service gross lease, the tenant will only have to pay the cost of the lease, and the landlord will be responsible for all of the expenses of running the building. In a triple-net lease, the tenant will pay rent plus all of the operating costs of the building. More specifically, the three nets are common area maintenance, property taxes, and capital expenditures. In some markets, the triple net charges can be 80 to 100% of the lease amount.
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Look at how the lease rates change over time. While some leases are flat--there is no rate increase for life of the lease--others will have annual increases. Rental ncreases can be tied to inflation through the consumer price index (CPI) or at a flat rate per year, such as 2 percent or $0.50 per square foot.
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Look at how much space you are renting. Every lease for 2,000 square feet is not the same. Some leases will be written on the basis of usable space, which means that you are actually getting 2,000 square feet of space within the walls of your space. Most office leases are written on the basis of rentable space, where you get the space within your walls and a pro rata share of the common area of the building (hallways, breakrooms, restrooms of the like). In that instance, you would get between 1,600 and 1,800 square feet of usable space and 200 to 400 square feet of common area space for a 2,000 square foot lease. The pro rata share of the common area is referred to as a load factor, and will typically be 10 to 20 percent in addition to the usable space. Paying more than a 20 percent load, unless it is typical in your market, is unreasonably high.
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Look at the term of the lease. Although short term leases are desirable to tenants because they can provide a great deal of flexibility, they also carry the risk of losing access to the space. Owners and investors typically prefer longer term leases because they provide greater stability as well as deferring the cost of leasing the space again.
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Consider how the lease will end. Many leases contain options which allow a tenant to automatically renew their lease for a set period of time at, frequently, a preset rate. In the event that the market rate has dropped below the option rent, though, the tenant can simply renegotiate their lease under these new terms.
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References
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