When it comes to commercial real estate leases, there’s no such thing as a typical lease. In fact, the Colorado Real Estate Commission hasn’t even attempted to define such a beast. So what are entrepreneurs to do in negotiating leases for their new businesses?
For starters, I’d suggest finding a good broker to represent their best interests. Meanwhile, though, they can get a head start by learning more about basic types of leases and provisions to negotiate.
There are three basic types of leases: triple net leases typically seen in a retail setting, a gross lease usually used in an office setting and a modified gross lease most commonly used for warehouse or commercial space.
A triple net lease puts the burden of most, if not all, the expenses on the back of the tenant and includes property taxes; fire, casualty and liability insurance; and common area maintenance. Common area maintenance normally includes water, sewer and trash. But not always, so be sure to check your lease to see what it actually does include since all leases are different.
A gross lease is the opposite of a triple net lease in including most expenses. In some cases, even janitorial services are included in what’s referred to as a full-service gross lease. The rate you’re quoted or pay is the total rent, which includes all expenses. This is usually used in the Grand Junction market for office space, especially in larger office buildings. Again, read the lease to make sure you’re aware of which expenses are included.
A modified gross lease could be considered a hybrid of triple net and gross leases since expenses are shared between the tenant and landlord. Typically, the tenant pays rent plus utilities — which could be just electric and gas or all the utilities, including water, sewer, trash, telephone and Internet. It all depends on what the lease states, so make sure you read the lease thoroughly.
Regardless of the type of lease, all terms are negotiable depending on the situation, market conditions and strength of the tenant and landlord. I would suggest anyone entering into a lease to have an experienced and knowledgeable broker represent them. In most cases, it would be a good idea to also have your attorney review the lease and point out potential issues.
Most people believe the basic terms of the lease — including the rent, term and size of the space — are the only items that can be negotiated. This couldn’t be further from the truth.
Depending on the situation, I would suggest negotiating for free rent, tenant finish allowance, early termination, first right of refusal for additional space or purchase and option to purchase — to mention just a few terms.
Since there are many terms that can be negotiated, it’s important to know what type of lease you’re entering into so you also know which costs are yours to pay and which are paid by the landlord.
Knowledge of the different types of available leaves along with professional representation will ensure a smooth transition for your business.