For beginners: Commercial Real Estate leases.

This article will cover commercial leasing definitions, types, security deposits, guarantor commercial leases, and commercial rent increases.

last updated Saturday, September 28, 2024
#commercial real estate leases #commercial lease types

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John Burson

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Commercial lease definition

Commercial leasing refers to renting commercial property, such as retail space, office space, industrial facilities, or other business-related property, for a specified period at a negotiated rate and responsibility for CapEx¹ and Opex². It involves negotiating terms between the lessor (property owner) and the lessee (tenant) regarding the property's use, maintenance, and occupancy, as well as the payment of rent and other associated costs. Commercial leasing is an essential component of the real estate industry and is often used by businesses to acquire the necessary space for their operations.

[1] Capital expenditures (CapEx) are funds a company uses to acquire, upgrade, and maintain physical assets such as property, plants, buildings, and technology.
[2] OPEX refers to operating expenses, which include all the costs of running a building. These include utilities, repairs and maintenance, exterior work, insurance, management, and property tax.

Commercial lease types

There are several types of commercial leases:

1. Gross Lease.
   A gross lease requires the tenant to pay a fixed amount of rent while the landlord pays for property expenses such as property taxes, insurance, and maintenance.
2. Percentage Lease.
   A percentage lease requires the tenant to pay a base rent plus a percentage of their sales.
3. Build-to-Suit Lease.
   A build-to-suit lease is one in which the landlord builds a property to meet the tenant's specific needs.
4. Net Lease.
   In a net lease, the tenant is responsible for paying a portion of the property expenses in addition to their rent. There are three net leases: single, double, and triple.
5. Modified Gross Lease.
   A modified gross lease is a combination of a gross and net lease, where the tenant pays a base rent plus a portion of the property expenses.
6. Absolute NNN Lease.
   An absolute NNN lease is a triple-net lease in which the tenant is responsible for all property expenses, including taxes, insurance, and maintenance.

   • Absolute NNN Ground Lease
     An absolute net-net-net (NNN) ground lease entails an agreement between a tenant and a landowner whereby the former leases the land to construct a new building. Under this lease agreement, the tenant becomes the owner of the building and is responsible for all expenses and costs relating to the construction and maintenance of the business location on the leased land. However, the landowner retains responsibility for the property taxes associated with the land itself annually.

     Absolute NNN ground leases are typically long-term, ranging from 50 to 99 years. Still, in the event of the tenant's default or the lease term's expiration, ownership of the building on the land reverts to the landowner.

The type of commercial lease that is best for a particular business depends on various factors, such as the company's size, operations, and financial stability.

Security deposit for commercial lease

A security deposit is a sum of money paid by a tenant to a landlord at the beginning of a commercial lease to protect against damage to the property or non-payment of rent. The security deposit amount is typically determined by negotiation between the landlord and the tenant and is specified in the lease agreement.

The purpose of a security deposit is to provide the landlord with some financial security if the tenant breaches the lease terms, such as by failing to pay rent or causing damage to the property. The landlord typically holds the security deposit in a separate account. It is returned to the tenant at the end of the lease, provided that the tenant has fulfilled all of their obligations under the lease agreement.

In some states, some laws govern the maximum amount of a security deposit that a landlord can require and the conditions under which the deposit must be returned to the tenant. Landlords and tenants need to understand the specific laws and regulations that apply to security deposits in their state.

Commercial rent increase

Commercial rent increases refer to raising the rent for a commercial property during a lease term. The lease agreement typically specifies the terms for rent increases and can be based on several factors, such as inflation, the Consumer Price Index (CPI), or market conditions.

In some cases, the lease agreement may specify a fixed rate of rent increase, such as a percentage of the current rent. In contrast, in other cases, the rent increase may be determined through negotiation between the landlord and the tenant. The frequency of rent increases is also specified in the lease agreement and can range from yearly to several years.

Landlords and tenants must understand the lease agreement terms regarding rent increases and applicable laws and regulations to ensure the process is carried out fairly and legally. Landlords should also consider market conditions and the tenant's ability to pay when deciding on a rent increase. In contrast, tenants should consider the impact of the growth on their business operations and financial stability.

Personal guarantor for commercial lease

A personal guarantor for a commercial lease co-signs the lease agreement and takes on the financial responsibility for fulfilling the lease terms if the tenant cannot do so. The personal guarantor effectively guarantees the landlord that the rent will be paid, even if the tenant cannot make payments.

Using a personal guarantor can benefit landlords by providing additional security if the tenant cannot fulfill their obligations under the lease agreement. For tenants, using a personal guarantor can increase their chances of being approved for a lease, as the personal guarantor is effectively vouching for the tenant's ability to pay rent.

Both tenants and personal guarantors need to understand the responsibilities involved in being a personal guarantor for a commercial lease, as well as the legal implications and potential consequences. Personal guarantors should be prepared to take on financial responsibility for the lease if necessary and should thoroughly review the terms of the lease agreement before agreeing to co-sign.

Corporate lease guarantee

A corporate lease guarantee is a promise by a company to assume the financial obligations of a tenant under a lease agreement. It is often used in commercial real estate transactions where the tenant is a business entity. A corporate lease guarantee provides the landlord with additional security by ensuring that rent payments will be made even if the tenant cannot fulfill its obligations under the lease agreement. A company's corporate officer usually signs the guarantee.

Good guy clause

A "good guy clause" is a lease agreement provision that requires a tenant to vacate the premises peacefully upon the termination of the lease. The clause is so named because it allows the tenant to leave the property in a "good guy" manner.

The "good guy clause" is typically triggered when the tenant is given notice of termination of the lease, either because the lease term has ended or because the landlord has exercised an option to terminate the lease early. In exchange for vacating the property peacefully, the tenant is usually released from any further obligations under the lease.
A "Good guy clause" is often included in lease agreements to minimize the cost and hassle of eviction proceedings, which can be time-consuming and expensive for both the landlord and the tenant.

FAQ

What does FSG mean in commercial real estate?

FSG stands for "full-service gross," a commercial lease commonly found in multi-tenant office buildings. The lease includes the base rent and other building operating expenses, such as utilities, janitorial services, maintenance and repairs, building insurance, property tax, and common area maintenance.

 
 
 

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