Hidden Costs in Common Commercial Lease Forms

Understanding Costs Associated with Your Commercial Lease

Navigating a commercial lease can feel like reading a foreign language to those without prior experience. And without understanding the language of the agreement you’re entering into, you may set yourself up for unexpected expenses and a whole lot of stress. The first step to understanding your lease costs is knowing that there are many different types of leases that will all impact your business in different ways financially.

While this may seem relatively simple, there are actually several different lease formats, including multiple variations on a net, gross, or percentage lease. And all of these formats have some serious pros and cons for the business owners. These different forms dictate who is responsible for things like operating expenses, maintenance, repairs, and taxes on the property. It’s important to know which type you are signing, because it can impact your ongoing costs significantly.

What is a net lease in commercial real estate?

Net leases are commonly used across all commercial property types. They tend to favor the landlord, primarily because they place the bulk of the variable cost responsibilities in the hands of the tenant. In a net lease, the landlord will typically charge a base rent. Additionally, the tenant will cover the cost of utilities, taxes, and a proportionate amount of these expenses or all of the expenses if your business occupies the entire building.

There are many different types of net lease forms, and each type outlines the amount of additional expenses the tenant is expected to cover. The hidden aspect of a net lease is that you will have an unclear monthly or annual payment due to fluctuating expenses and taxes, and you will have limited control over these exposures unless you negotiate some controls into your lease before it is signed.

What is a gross lease for office or industrial properties?

Another common lease type is the gross lease. Gross leases tend to be more tenant-friendly because there is significantly less variance in the amount of your payments. With these lease types, the tenants make an agreed-upon periodic rent payment. The landlord then uses what they’ve collected from this payment to cover all the building’s expenses, including utilities, taxes, insurance, maintenance, and some administrative fees.

With a gross lease, your business can be assured that your expenses for space will stay more consistent throughout the lease term. There will still likely be rent increases over the course of the term, but these will be scheduled, not variable. That being said, it’s important to be aware that this type of lease is less common because landlords simply do not like the risk you are trying to eliminate any more than you do; however, it’s not out of the questions if you have several space options and have created a competitive environment for your occupancy.

What is a percentage lease in commercial real estate?

The percentage lease is the last commonly used lease type. These leases are frequently used for retail properties. Tenants with percentage leases pay a base rent in addition to a percentage of their monthly or annual revenue. These base rents are typically lower than in the case of a normal net or gross lease, because the two parties benefit mutually from the success of the business.

With this lease type, the tenant does not have to worry about as many costs as they would with other lease types, and the landlord is more encouraged to keep the property in favorable condition. Additionally, the building owner will benefit from a highly successful retail operation.

Why it’s important to understand the difference between a net, gross, and percentage lease

It’s clear that the type of lease you sign is an important consideration when evaluating and negotiating any office, industrial, or retail space. The unexpected costs for not understanding these differences can be quite significant. Our recommendation is to always have a professional tenant representation broker on your side of the table, along with a local real estate attorney who knows the ins and outs of your local market. Most of the time a landlord will be represented by a listing agent who is focused on the best interest of the building owner, not on you. By partnering with a tenant rep broker, you can help protect yourself from hidden lease costs and guarantee that you are setting your business up for financial success.

Want to talk to a tenant rep broker about your lease to make sure you understand and are prepared for all leasing costs? Connect with a Rokos broker today! We’re here for you and happy to help.

Rokos Advisors is an award-winning Minneapolis – St. Paul based commercial real estate/tenant representation firm specializing in helping businesses find the perfect office or industrial space for their company.