July 10, 2009
Understanding Commercial Leases
The idea of investing in commercial real estate can be daunting”even for the seasoned residential investor. The industry terminology, the differences in funding, and the overall culture of the commercial real estate world can be intimidating, to say the least. While these factors may make your entry into commercial investing a little frightening, dont let it shake your confidence. In fact, the commercial real estate sector is actually quite strong in many markets”and it is the perfect time for novice investors to join the game.
If you are planning to invest in a commercial property, leasing the space out can be extremely profitable. Depending on the type of tenants you plan to have, one type of lease may be more attractive than others. Read the following to gain a basic understanding of the various types of commercial leases.
Net lease: The tenant is responsible for paying the rent in addition to a portion of the maintenance fees, some operating expenses and insurance premiums.
Triple-net lease: This type of lease is most commonly used for tenants of a freestanding building. The tenant is responsible for paying all fees and operating expenses. If you are currently a tenant in this type of lease, it may be wise for you to consider purchasing the property, if the owner is willing to accept an offer.
Gross lease: Similar to a traditional apartment lease, with a gross lease, the tenant is responsible for paying a set rent at a predetermined rate established by the building owner. The landlord then uses the funds from the tenants rent to pay operating costs, insurance and taxes for the property.
Ground lease: Also known as a land lease, ground leases includes the grounds of the property as well as the property itself in the lease. Tenants with this type of lease option must remember that improvements made to the property usually revert back to the landlord at the time that the lease is terminated. This includes new buildings or structures constructed on the property during the lease period.
Shopping center leases: With this type of lease, the tenant is given the least control. While the tenant is responsible for paying an established rent rate that typically directly coincides with the square footage that is used, they also usually must pay a predetermined percentage of gross sales and a portion of the property taxes. The tenant usually must adhere to strict guidelines about signs and promotion, established traffic areas (especially for businesses with pick-up and delivery services), and the tenant may be moved to a new location within the shopping center at the discretion of the owner.
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