Understanding the Basics of a Lease

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In commercial real estate, there are many ways a lease can be structured. It is important when negotiating a lease, whether as a tenant or a landlord, that you consider the impact the lease structure will have on your business.

Since the needs of landlords and tenants vary widely, knowing the various lease structures and how these could impact your business are vital to a successful landlord/tenant relationship.

Often, the landlord’s motivation in securing a particular lease structure is instilling predictability and consistency for future budgeting, cash flow and profit management. A tenant may have much different motivation, such as keeping initial costs low, understanding future liabilities or not being tied to a long lease term.

Whatever your motivation, the following summary of different lease types provides a good foundation of understanding. 

A commercial lease should tell you what is included in the rental amount that is paid to the landlord. Most leases are either; gross leases, triple net leases or somewhere in between. Unfortunately, not all leases will state explicitly into which category they fall, therefore it is vital to read the document carefully. A gross lease typically is all-inclusive, meaning the tenant is responsible for one sum and therefore the landlord is responsible for payment of real estate taxes, property hazard insurance and maintenance expenses.  The tenants utilities may or may or may not be included in a gross lease.  In a triple net lease, the tenant pays a set rental amount to the landlord, but also must pay a share of landlords real estate taxes, hazard insurance, maintenance expenses, and building utilities.  Understanding the difference between the various lease types is particularly important when comparing multiple spaces and ensure a comparison of apples to apples.

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