Avoiding Pitfalls of Commercial Real Estate Leases

There are essentially three classifications of leases in regards to commercial real estate: Full Service lease, Net-Sales lease, and Modified gross commercial real estate lease. The main similarity between these leases is they all offer a basis rent payment with added operating expense subtracted at the end of the term. This allows brokers and developers to calculate operating costs over the course of the lease without taking into account any increases in expenses incurred by the business at the end of the lease term. This calculation is also very useful when a business wants to calculate future capital expenses. The key difference is that for Net-Sales leases, the amount a business pays for operating expenses during the term of the lease does not include any amounts the business may pay for the improvements they make during that time.

The term of a commercial real estate lease can be for five, ten, or twenty years. A ten year term will always start on a cash-flow note. In order to determine how much the lease is worth at the beginning of the term, the current market value of the property is compared to the amount the business owes at the beginning of the term. It also takes into account the amount of time the business can use the property while paying the lease. If the amount the business owes changes, so does the base rent.

Most commercial real estate leases will have a clause allowing the property owner to increase the monthly rent at any point throughout the term of the lease. For example, if the property owner decides to add another room, which costs them an additional monthly rent, during the term of the lease. They would simply need to provide written documentation to the leasing agent describing how the additional room would cost them each month. It is not unusual for property owners to have to pay the same amount each month during the life of the lease, but be allowed to increase the base rental amount plus any expenses at the end of the lease.

One of the most common expenses that must be paid each month is property taxes. Many commercial real estate leases will require an additional amount of taxes to be paid each year. Any expenses associated with these taxes will be listed separately from the base rental amount. These expenses include the property taxes, insurance premiums, and common area maintenance such as sidewalks and roads. When these are added together, they may amount to several thousands of dollars.

In order to legally terminate a commercial real estate lease, the property owner must give written notice. This notice must specifically state that the property owner intends to terminate the lease. The notice must also include the reasons why the termination is being sought and must be filed with the county recorder in the county in which the property is located. The most common way to terminate a lease terms is through eviction. If this process is not legally complete, the owner may choose to pursue a court battle in an attempt to regain control of the property.

Commercial property owners who wish to legally terminate their Commercial Real Estate Lease often choose to do so by paying the base rent and then refusing to pay additional rent after the lease term has expired. This strategy allows them to remain in control of the property without having to pay the full base rent amount. However, it also requires that they have first notified their landlord that they intend to exercise their option to renew the lease. Failure to properly notify the landlord will cause him to suffer a penalty for attempting to collect additional rent.

Many commercial real estate leases contain provisions which allow the landlords to change the rules at any time without prior notice. Unfortunately, landlords rarely adhere to this rule. As a result, many property owners and tenants wind up paying additional fees for their inability to comply with the lease provisions. In addition, some property owners and tenants fail to notify their property management company that the lease has provisions which allow them to change the rules any time they wish. Unfortunately, the company does not always act in a timely manner or make changes that are in the best interests of the tenant and the landlord. Consequently, these mistakes can create additional problems and costs for both parties.

One method that apartment and commercial real estate lease owners use to avoid these types of problems is to enter into a net lease structure. Net lease structures feature a discount structure whereby the landlord discounts the cost of operating costs and includes this in the base rental amount. While the tenant continues to pay the agreed upon base rental amount, he receives the benefit of additional benefits including operating costs discounts and discounted operating costs.