When you’re trying to build a business park in a busy commercial sector of town, you’re on the road to success. This road will be filled with obstacles, though, including decisions about lease structures.
There are many commercial lease options that could fit your needs, so it can be difficult to choose the best one for you. Ideally, the lease you choose will protect you while meeting your needs and goals as a landlord. Here are five leases to consider for your business park:
1. Gross Lease
Often called a full-service lease, the gross lease structure is used when the tenant pays a fixed rent payment that covers all extra expenses. With this all-inclusive structure, the landlord will use the rent payment to cover expenses like taxes, insurance, maintenance, and repairs.
This lease also includes the tenant’s utilities including water, gas, electricity, etc. It doesn’t matter how much of each utility the tenant uses—they still pay the same amount. As you can imagine, this presents issues for the typical landlord because some renters abuse the privilege of “free” utilities, and the extra costs eat into your profits.
On the other hand, a gross lease is highly attractive to tenants. It may give the illusion that operating expenses are cheaper, even though the utility costs are built into the rent price. It’s also convenient. A savvy landlord can set a rent price that exceeds the cost of utilities, increasing profits. A landlord also has complete control over the property under these terms.
2. Modified Gross Lease
As explained by a detailed blog post by AssetsAmerica.com, a modified gross lease offers many benefits to landlords. It dictates that along with rent, the tenants will pay their share of property taxes, insurance, and common area maintenance (CAMS). The tenant usually pays other aspects as well like utilities and janitorial services.
The terms of the lease are easily manipulated to meet the needs of the landlord or the tenant. Its flexibility makes it one of the easier lease structures for landlords to set up—it can even represent different responsibilities unique to individual tenants if need be.
Additionally, it gives extra control to the landlord—since maintenance and janitorial services are covered, the landlord doesn’t have to be concerned that the property will be in disrepair.
Unfortunately, poor estimations in modified gross leases can cut into the landlord’s profits and property values. As AssetsAmerica.com explains, a landlord that undercharges for CAMS might not have enough funds to keep up the appearance of the common areas, damaging their relationships with tenants.
3. Absolute Net Lease
The absolute net lease is among the most common structures for residential properties but isn’t used as frequently in commercial sectors. This occurs when the landlord requires the tenant pay all expenses of renting the property. This includes taxes, maintenance, structural maintenance, parking lot maintenance, utilities, and more.
The positive side of this structure is that the landlord has much less to do. A good tenant will keep the property in tip-top shape without the landlord having to lift a finger. Great tenant screening services can help ensure a positive experience with this lease structure.
However, there are a lot of risks involved. If the tenants do not keep up their end of the lease, the property can easily fall into disrepair. For example, a shopping plaza that’s poorly maintained will discourage customers, which will discourage future tenants and make it more difficult to keep renters. Property damage may also occur, damaging your values.
4. Double Net Lease
A double net lease dictates the tenant must pay the rent, a pro-rated share of the property taxes, and property insurance to the landlord. The landlord then applies that amount directly to the associated expenses. The tenant must pay utilities and janitorial services as well, but they’re responsible for setting those up and paying them on their own.
It’s a great insurance policy for landlords who want to ensure that property taxes and insurance are paid every month. It also provides a very simple lease structure to minimize the amount of work a landlord must put into a property.
5. Triple Net Lease
Herein lies the most popular form of commercial lease. As you might have guessed, the triple net lease ensures that three expenses are paid alongside the monthly rent expense: pro-rated property taxes, insurance, and maintenance. Again, the tenant will be responsible to set up and pay their own utilities and other non-specified operating expenses.
Many commercial landlords are relieved at the added protection and control of their properties. Under this contract, landlords have the power to evict tenants that are not keeping up their end of the expenses and maintaining the property.
It’s a landlord-friendly lease, and tenants like it too because it gives them greater transparency into the lease structure and how the property is being handled.