A wrong decision for your business has the ability to ruin the core foundation of a company. Before signing any commercial lease, one must thoroughly understand the nature, types, and applications of a lease agreement. Signing a commercial lease agreement is an exciting occasion, but this decision should not be taken lightly due to the significant impact it can have on your business.
Business owners usually have a lot of questions in their minds regarding the nature of a commercial lease agreement. For instance, what is a commercial lease? What are the different types of commercial leases? What is the best commercial lease for a business? Are there any expenses that landlords would cover during the lease? What do tenants pay for on a new lease space? Choosing the best location for a business lease? What are the best commercial spaces to lease nearby me? How to choose the best commercial lease for a business?
These all are big questions; the answers to these questions are different for every business. In this blog, JW Management has all-inclusively discussed signing a commercial lease, so stay connected to learn it in detail.
What Is a Commercial Lease?
Commercial Lease is a lease that entitles business owners to the right to conduct business on a commercial property. Typically, commercial leases last from five to ten years, building a long-term relationship between the lessor and the lessee. Most businesses prefer renting a property rather than buying one because it needs less capital.
Leasing a commercial property binds the lessor and the lessee in a contract called a commercial lease agreement. The lease agreement outlines the terms and conditions that the business owner must follow as agreed by the lessor and the lessee. The commercial lease agreement is more complex considering that it is negotiable, it varies from one lease to another.
Significant Differences Between a Commercial Lease and Residential Lease
Though residential and commercial leases are both real estate properties that share some standard features; these two differ in many significant ways.The following are key differences between the residential and commercial leases:
1. Usage of Property
Residential leases are spaces intended to give people property rights for their living arrangements. Commercial leases are spaces used to manufacture, distribute and sell products or services. In this agreement, commercial spaces or areas include retail stores, offices, restaurants, warehouses, or parking garages.
2. Length of Lease
Commercial leases are more detailed and binding than residential leases. Generally, commercial leases last for a minimum of five years to over ten years. The business owners will have renewal options for the leased space before the agreement expires. Prior to leasing a property, the land owner invests resources to build out the property in preparation for the new occupant. Thus, the lessees’ commitment to rent a commercial property for a longer period is beneficial for the landlord as well as the tenant. As for residential leases, the leasing agreements are for one year, followed by monthly or annual renewals.
3. Legal Protection
Legal protection for commercial leases and residential leases often vary by state. In a residential lease, landlords maintain the property and offer several legal protections to residential tenants compared to commercial lessees. Often, tenants in a residential lease are protected from eviction and increases in rental fees. On the other hand, when signing a commercial lease, the terms are spelled out in the details of the lease agreement. It is prudent to understand the different types of leases that are in the commercial real estate industry.
4. Rent Control Laws
Residential leases are protected by an increase in rental fees as stated in legal protection. On the other hand, some commercial leases allow for passthrough increases in the monthly rent. The business owner and the commercial property owner are only bound by restrictions stated and agreed to by both ends when leasing a commercial space. It is always best to understand the different types of leases that are in the real estate industry.
Types of Commercial Leases
The location of a commercial property is one of the critical factors to a profitable business and its overall success. Thus, it is important to understand the different leasing agreements before signing one.
Leasing a commercial property may seem pretty straightforward; however, it is not. Understanding the type of commercial lease that suits your business best will save you from getting the wrong one. It is imperative to know how much tenants must pay to lease a commercial property? Do tenants pay for the utilities and maintenance expenses? Who is responsible for paying the property tax and insurance? The answer to these questions varies depending on the type of commercial lease that you will be signing. Here are the 6 types of commercial leases that will help you decide when leasing a commercial property.
1. Full-Service Lease
In commercial real estate, a full-service lease is also called a full-service gross lease or gross lease. It is a lease agreement in which the tenant only pays the base rent. The lessor pays all operating expenses related to the commercial property for lease. These operational expenses are insurance, utilities, taxes, and maintenance costs.
Full-Service Lease = Base Rent + Operating Expenses
Some businesses prefer having a full-service lease. This lease lessens the burden on the business owner’s end, enabling them to focus more on their business operations. The lessor of a full-service or gross lease can often raise the rent per square foot since all the expenses are covered. In some other cases, “expense stop” is included in a full-service lease. The expense stop is the allowable expense covered by the lessor to help protect the lease payment during extreme economic cases. Any excess amount incurred from the expense stop will be paid responsibly by the tenants. This lease agreement is ideal for business owners possessing strict budgets as they can expect a fixed amount in their leasing expenses.
2. Modified Gross Lease
The second primary type of commercial lease is a modified gross lease, also called a modified net lease. This type of lease is the middle ground between a full-service lease and a triple net lease. When it comes to the operating expenses, the modified gross lease offers a wide range of flexible negotiations between the lessor and the lessee.
In a modified gross lease, the lessee will pay the base rent and a portion of the operating expenses as agreed with the lessor. The commonly negotiated costs between a landlord and a tenant include property taxes and insurance, utilities, structural repairs, and common area maintenance. The modified gross lease is typically in commercial towers and business parks.
3. Single Net Lease
A single net lease or N lease is the easiest type of commercial lease. In this type of lease, the tenants pay the base rent and property taxes associated with the space. The base rent for this lease is comparatively lesser than a gross lease. Moreover, the landlord pays the remaining operating expenses, such as property maintenance and utilities.
4. Double Net Lease (NN)
A double net lease and single net lease are very much alike. The only difference between a single and double net lease is that the tenant pays the property insurance on top of the base rent and the taxes. The landlord covers operating expenses such as utilities, property maintenance, and repairs in this type of lease. The double net lease is typical in a multi-tenant commercial property.
5. Triple Net Lease (NNN)
A triple net lease often called an NNN lease, is the exact opposite of a full-service or gross lease. The operating costs of the commercial property are accountable to the tenants. In the triple net lease, a tenant pays the base rent, prorated share of property tax and insurance, property maintenance, and repairs. In return, tenants can change the property’s design as they see fit. The base rent of the NNN lease is lower compared to the gross lease considering that the operating expenses are taken care of by the tenants.
6. Percentage Lease
The structures of percentage lease and gross lease are very much alike. Percentage lease is popular among retail stores and restaurants. In a percentage lease, the tenants are responsible for paying a percentage of their gross revenue to the landlord aside from the base rent. The landlord and the tenant agree upon the portion of the sales during the commercial lease agreement.
Percentage Lease = Base Rent + Operating Cost + Percentage of Gross Sales
Locating the Best Commercial Space for Your Business
The most crucial and most daunting decision that a business owner makes is locating the best commercial office space for their business. A lot of considerations should be taken care of before signing a lease agreement. Thus, it is essential to ensure that you are making the right decision for your business and your employees.
It is also significant that you enter onto a lease with a professional property management team that prioritizes your business needs, wants and requirements. A commercial lease is a long-term contract. Entering into an agreement with a business-friendly commercial real estate company, such as JW Property Management, will give you a worry-free leasing experience.
JW Management has been in the business since 1978. The multi-tenant and single-tenant properties of JW Management are in North Arlington Entertainment District, Westgate Plaza, and The Hospital District, 1625 West Mockingbird. Being in the industry for decades, JW Management is known for having a trustworthy team that provides outstanding support to its tenants. It is not just the building you will be located in, it is also about the relationship with the Property management team that makes a big difference. Take the time to really do your research on the commercial real estate company you will be choosing to do business with.
Top 5 Steps to Locating Your Next Office Space
Finding an office space is more tedious and frustrating than looking for an apartment. Navigating the nuts and bolts of commercial real estate is a daunting activity. Wrong judgment can lead to disastrous repercussions for your businesses.
When you wholly understand commercial real estate leasing and know your business needs and financial affordability, you are fully prepared to jump into the ocean of tenant-landlord relationships. In order to assist you throughout the leasing mechanism, JW Management has jotted down the top 5 steps to locating your next office space that will meet your present and future business needs.
1. Understanding the Cost Associated With Leasing a New Office Space
One of the most basic and important factors in leasing a commercial space is the rent. Often, the leasing cost varies from one place to another. To determine if the leasing cost is within the company’s budget, business owners must identify the leasing costs associated with the office space. Apparently, signing your lease without full knowledge of the total cost can turn an affordable location into an expensive one. Protect your business from unexpected charges.
2. Identifying Your New Office Space and Commercial Lease Requirements
If you do not have any business plan, prepare it first. To get clarity of your needs and wants, you must draft a business plan- documented, critically examined, and ready to implement. Once you have an all-inclusive master plan in your hand, employ it to determine your new office space and commercial lease requirements.
Ultimately, your new office space is a tool that will help you achieve your business goals laid out in your all-inclusive, strategic, and long-term master plan. DFW Office Spaces are among the viable solutions that offer your business plans the best platform to exhibit successful results.
3. Prioritize Your New Commercial Office Space Location
The first and foremost task of a business owner is to prioritize the office location because employees don’t like a long commute to workplaces. Clutch’s research reveals that almost half of surveyed employees consider working near their houses as the most important factor in an office location.
According to research, short commutes lead to happier and more productive employees working in the offices. There are several Arlington Tx Office Spaces with the top locations corresponding to the location factor described. Easily commutable offices attract and retain workers from a larger geographical area. Employees also love being near coffee shops and restaurants. The parking space is another factor as most of the workforce drive (70%) alone to their offices.
4. Take Into Consideration Your Employees’ Needs When Moving into a New Office.
Gather your all-star team and ask them what matters to them the most in an office. It is essential to consider your employees’ opinions before signing a new commercial lease agreement. Eliciting the views of your employees make them feel valued and taken into consideration before moving to a new office. In this manner, employees tend to have more commitment to their job, thus making them more efficient.
A quality workspace design leads to a less stressful and more productive atmosphere. It is essential that employers take the physical work environment of their employees into consideration. Employees need to feel comfortable and calm in their physical work settings to produce their best work. Here are some lists that a business owner should consider before signing a new lease.
- Wellness Rooms
- Ergonomic Seating
- Company Fitness Benefits
- Healthier Lunch Options
- Sit-Stand Desks
So, sit with your staff before signing a commercial lease and locating your new office space.
5. Select an Office Space With a Wide Selection of Functional Rooms
A sense of autonomy in the working space is a significant prerequisite so try selecting an office space with various rooms, comfortable and spacious. You must find an office space with multiple rooms for your workforce to complete a task.
According to research, many American businesses offer various spaces in their offices.
- Personal Spaces- 74%
- Wide Meeting Rooms- 56%
- Small Collaborative Spaces- 53%
- Places to Relax- 51%
- Quiet Places- 41%
Always choose an office design that fits your employees’ needs and efficient workflow at your business. If you have a handsome budget, you may get the service of an interior designer for better office design.
Signing a commercial lease agreement is daunting, so businesses should meticulously study the ins and outs of leases before finalizing any lease agreement. JW Management has left no stone unturned to give real estate tenants an inclusive explanation of commercial leases and their practical implementation.
Leasing Process: JW Management Tools
This complete blog explains the maximum aspects of commercial leasing; however, if you want to learn more about commercial leasing terms for warehouse, office space, flex, industrial, or any other commercial space, click the following enlisted JW Management Tools.
- Tenant Construction Buildout
- Leasing an Office, Flex, Industrial, or Warehouse Space
- Designing & Permitting Your Office, or Warehouse Space
Learn more about Commercial Leasing Terms and Definitions
Craig Wasilchak is the COO of JW Management Company, a Family owned and operated Commercial Property Investment and Management Company. Craig is also an active member of the Entrepreneurs’ Organization, as he is the owner of a business with over $1 Million in annual sales.
JW Management Company owns, lease, and manage various office and warehouse spaces in North Arlington, Westgate Plaza, and The Dallas Medical District, 1625 Mockingbird Lane. Our properties maintain a high tenant retention rate based on the top-notch customer service and quality maintenance of our properties. Whether it is a highly rated Arlington Tx Office space or DFW Office Space, JW Management is happy to tour our commercial real estate spaces with you.