Leasing a commercial property is often a more realistic and attainable goal for business owners, as opposed to buying a location outright. Leases also give businesses a degree of flexibility, allowing them to grow and build a brand without being tied to a physical location for years to come. Yet, leases remain a bit of a mystery for many entrepreneurs. With so many different types of leases, it can be difficult to which is ideal for your unique needs and which isn’t.
As a seasoned San Francisco real estate team, we’ve helped hundreds of clients negotiate leasing agreements and find an arrangement that works best for their business.
By far, the most common questions we receive regarding leases pertain to the various types of agreements available. Clients want to know the nuances of each lease type and what to look for, so they can make the most informed and astute decision possible.
Over time, our team has become extremely well-versed in this area and thought it would be beneficial to share insider tips so that you can be prepared when negotiating your next commercial lease.
After all, in the worlds of Oscar Wilde: “The only thing to do with good advice is to pass it on. It is never of any use to oneself.”
Below are overviews on lease types and the pros and cons associated with each:
- THE TRIPLE NET LEASE
Many real estate professionals can only dream of having a dollar every time they’ve been asked: “What is a triple net lease?”. Many tenants have heard of these popular agreements, but aren’t necessarily aware of what they entail.
The triple net lease is an agreement on a property where the tenant agrees to pay all real estate taxes, building insurance, and maintenance (otherwise known as the “three nets”).
The most desirable benefit of a triple net lease is that the total rent cost is often lower in this lease type than in a percentage lease.
Also, even though you are responsible for paying the three largest operating expenses associated with a commercial property, a triple net lease comes with more property control for the tenant. For example, tenants who are signed to an NNN lease are not required to wait for their landlord to find and hire a repairman should equipment break down or building maintenance be required. Instead, the tenant is able to act as the owner in these situations, hiring whomever they choose.
Another advantage? With an NNN lease, business owners don’t have to worry about landlords looming over their day-to-day operations. Since the tenant is responsible for all tax, insurance and maintenance costs associated with the property, there are few reasons for a landlord to become involved from a management standpoint. For entrepreneurs who value their independence, this is often a highly-sought-after perk.
- THE GROSS LEASE
Compared to other types of leases, the gross lease is often considered to be the most convenient by tenants because it is established based upon a base rental fee. This fee is calculated by the landlord and typically accounts for expenses like utilities, maintenance, etc.
For many entrepreneurs, the ability to calculate a business operation budget with a set-in-stone rent cost is desirable. It provides peace of mind, knowing that the amount to be allotted each month will not fluctuate.
However, committing to a gross lease does come with the potential to pay more than you would if you went with another lease type. This is because you are trusting that the landlord’s calculations of what the property costs are accurate. Often times, landlords tack on a little extra, resulting in a payment plan that benefits them more than it benefits the tenant.
If you are considering opting into a gross lease, it is always advisable to have an experienced real estate professional review the agreement before signing.
- THE MODIFIED GROSS LEASE
This particular sort of commercial lease is often viewed as a compromise between tenants and landlords. It is similar to an NNN lease in the fact that the tenant is still required to cover the cost of some of the “nets”, but it is different because it allows the tenant to negotiate which nets they will cover and which they won’t. This gives the tenant the ability to come to an agreement that suits their individual needs more closely.
Also, when entering into a modified gross lease, the tenant is not obligated to pay the difference should property taxes, insurance costs, or other bills increase. This would not be the case if the tenant agreed to an NNN lease.
If you have reviewed the conditions of both an NNN lease and a gross lease and feel that neither offers an ideal outcome for you, a modified gross lease will likely be a happy medium.
Remember, when seeking commercial real estate for lease, you want to be sure that you are agreeing to a lease contract that benefits you not just today, but in the future as well.
With the over 1.3 million square feet in leasing transactions taking place in the San Francisco area in the second quarter of 2017 alone, knowing your lease types in this red-hot market could be the difference between making your business fruitful, or making it flop.
That’s why finding a real estate professional who knows how to sift through the fine print and make knowledgeable recommendations for office rental in San Francisco is always a sharp move for any tenant.
Interested in learning more about how our team can assist you in getting the most out of your next leasing agreement? Contact me today!