“You ought to be able to explain why you’re taking the job you’re taking, why you’re making the investment you’re making, or whatever it may be. And if it can’t stand applying pencil to paper, you’d better think it through some more. And if you can’t write an intelligent answer to those questions, don’t do it.”
These compelling words come from the mind of American businessman and investor Warren Buffett — with a net worth exceeding $75 billion, he knows a bit about success. In an ever-complex and risk-laden industry, Buffet’s message suggests that true reward comes from blatant dedication and a willingness to learn.
As a commercial real estate investor, it’s crucial to know why all facets of the industry exist in order to leverage them to your advantage. So, before you sign a commercial lease, take a moment to educate yourself about the types of options out there.
As opposed to a residential lease agreement, commercial leases grant room for negotiation. As an investor, you have the power to draft a lease that’s well suited for you and the tenant.
Today, four different lease types exist on the market; a Gross Lease requires you, the landlord, to pay for all expenses associated with the property; a Single Net Lease requires you to pay for maintenance and insurance while the tenant pays for utilities and property tax; a Double Net Lease requires you to pay for maintenance while the tenant pays utilities, property taxes and insurance; and finally, a Triple Net Lease requires you to pay for structural repairs while the tenant pays for all costs associated with the space.
Once you’ve chosen the best option for you, sit down and figure out the nitty-gritty details of the agreement — this is where blatant determination comes into play.
Start by establishing a flat rental rate, while considering average costs in your market, the demographics of your area and the quality and, if you’re renting a retail property, ease of access to the potential shoppers. Factor in external costs based on the type of lease agreement you’ve opted to pursue. If it’s a Triple Net Lease, for example, you’ll want to identify who’s responsible for paying maintenance, insurance and tax costs at this stage.
Be thorough in your approach — whether it be a sidewalk, garden, hallway or shared closet space, identify who is responsible for its care before coming to an agreement.
Finally, ask yourself, how long do I want this lease to last? The length will depend on the amount of flexibility your tenant prefers. If you sign a commercial lease with long terms, stipulate a set rental increase over the extended period to account for changing market conditions.
Be aware that tenants may request special clauses to limit use or surrounding commercial competition. Know what options are available and how they may impact your future business.
While the list above is far from exhaustive, we hope it will inspire you to think outside of the box. Ultimately, when drafting a complex legal agreement of this nature, and before you sign a commercial lease, it’s strongly advised to consult with an attorney or specialist to ensure all requirements are being met under the law. Connect with a commercial real estate professional through myNOI’s Get Help service.
Read more about commercial leases and letters of intent.