Commercial Real Estate Lease Terms

If you need space to lease for your business, you will be searching for commercial property to rent. Whether you need office space, a restaurant, retail strip, an industrial warehouse or other type of building, you will be required to sign a commercial real estate lease agreement. These contracts may differ in each state and with each management company, but there are clauses that are similar in a majority of lease agreements.

Term, Rental Rate and Escalations

Most commercial lease rates are determined by the amount of square footage you are renting per month. Generally, the larger the space, the lower your rate per square foot. When negotiating a commercial lease agreement, the tenant should work toward the shortest term with the lowest rental rate. Meanwhile, the landlord will want you to sign a long-term lease and will offer the lowest rent for the longest time that you will agree to. However, rent escalations will increase your rate automatically each year, so you must know how much your cost will be in subsequent years. Some escalations are a fixed percent of the lease for inflation and increased costs of the landlord over the years of the term.

Triple Net

Commercial spaces, such as office buildings, restaurants and strip malls, may require tenants to pay a portion of other expenses as an additional charge to their monthly rent. Triple net leases, also known as NNN, include a portion of the expense for property taxes, hazard insurance and maintenance. The amount is prorated according to the amount of square footage that you lease, so that each tenant pays a fair share. The landlord may adjust these annually, depending on any changes in the amounts.

Common Area Maintenance

Common area maintenance, or CAM, is the amount charged for maintaining areas shared by all tenants, such as stairways, elevators, parking lots and walkways. This expense is calculated as part of triple net leases. To determine the cost of CAM for each space, you must first know the gross leasable area, or GLA, which is the total area that can be occupied by tenants. To find out how much your portion of the CAM expense is, divide the GLA into the square footage of the space that you will be leasing. For example, if your space is 1,000 square feet and the GLA is 10,000 square feet, your CAM share is 1,000 divided by 10,000, which equals 0.1, or 10 percent of the total cost of maintenance.

Improvements and Repairs

Before you move into your space, you may want to change the layout or perform other construction and improvements to fit your business model. You can negotiate the cost of this with the landlord or property manager. However, it normally is the tenant's responsibility to complete any necessary changes. The landlord will require that you obtain the proper permits for construction performed. Once you have moved in, other repairs to the space may be required, for which the tenant is responsible. However, if repairs are needed due to reasonable wear and tear, the landlord may be obligated to fix them.

References

• Smart Business; Real Estate Escalation of Rent; David Willis; January 2008
• Westwood Net Lease Advisors: What is a Triple Net Lease Definition & How They Compare to Other Commercial Investments
• SlideShare: How Common Area Maintenance (CAM) Is Calculated; Marcus Bourn
• The 'Lectric Law Library: Commercial Lease Agreement

Resources

• OfficeSpace: Commercial Real Estate Terminology