Understanding Commercial Real Estate leases

As a professional landlord, we all want to achieve the perfect landlord/tenant relationship. Why? Because it makes for easier work.

You see for any investor, new or experienced, when you invest in a rental property you want to be able to keep it sustainable. Never empty. Never cutting into your profits. But always working for you.

That is why picking the right lease is so important – especially in commercial real estate.

Pick the wrong one and they could end up looking elsewhere. You need to get it right.

So ask yourself this question: what do you need out of your lease agreement? Simple. A guaranteed rental income, plus the means to control the costs of your property.

And your tenants? They will want to be able to peg their rental costs as closely as possible. Why? Because no one wants to pay above and beyond if the property is not worth it.

You need to prove it’s worth pursuing.

To help you choose, we have compiled together a list of the UK’s 3 top commercial real estate leases:

The Gross Lease

This is sometimes described separately from the full service lease, but their differences are not that much. Essentially what they both involve is the landlord/owner taking full responsibility for all the building expenses: taxes, insurance and maintenance.

All your tenants will pay is a fixed rent, which can be used to pay for the expenses that may incur.

A point to remember here is that costs increase over time. And if costs increase, so will your expenses. That is why it is important to keep yourself covered by including an escalation clause in your lease. This enables you to increase the rent owed from your tenants, so that their fees will continue to cover the costs.

Of all the commercial leases, this is probably the least favourable to you as an investor. Here your tenants only have to pay the rent, the rest is on you as their landlord and if some expensive maintenance is required, it could leave you with negative profits.

The Triple Net Lease

This type of lease requires the tenant to pay a significant share of the expenses, as well as the taxes and insurance related to their rental unit.

The triple net lease is commonly used in multi-tenant industrial and retail properties, and works quite favourably for you – the landlord. Why? Because their expenses will vary: electricity, plus the taxes, maintenance and insurance can all work to boost your profits.

This admittedly though, makes many tenants resistant to enter into this type of lease. It gives them no control over the increases in their expenses, and prevents them from budgeting their costs. It is completely shared, even down to the cost of roof replacement.

The Modified Net Lease

Is essentially a compromise between the gross lease and the triple net lease.

Here, how the property is maintained is decided between you and your tenant. As the landlord, you will take most of the responsibility, but your tenant too will also be in charge of caring for certain aspects of the property.

And the taxes and insurance? That will be your tenant’s job too.

This type of lease is great for industrial, retail or multi-tenant office properties. It is uniquely versatile in its flexibility, and allows you to both come to an equal agreement on what is required of each of you.

And we have to admit, it is very promising.

Of all the real estate commercial leases, the modified net lease works to benefit both your interests, allowing you to control and generate a positive cash flow, whilst giving your tenant an element of control that will boost their confidence as a successful company.

What more can you ask for?