If you want to find and keep good tenants as a business landlord, you need to know the pros and cons of the different types of commercial leases. When leasing commercial real estate, a business lease is an agreement that you, as the owner or landlord, must follow.
The lease spells out exactly what each party can and cannot do. There is a business lease for the space being leased as well as the whole building. A lease is not always the same thing. Every deal you write should take into account the specific wants and needs of both you and your tenant. These are the main types of business leases, along with the pros and cons of each. This will help you understand the differences.
As with any investment, leasing commercial real estate has pros and cons. As a real estate investor, you may wonder if commercial real estate is right for you. In this insightful read, we explore the pros and cons of leasing commercial real estate and show you how STRATAFOLIO can assist you every step of the way.
What is a Gross or Full-Service Lease?
A gross lease, which is also called a full-service lease, is an agreement where the rent is set every month. The owner pays for all the costs of running and maintaining the property. These costs usually include taxes, utilities, property management, and insurance. Think of a full-service gross lease as being like an all-inclusive holiday package: you pay one price for your stay, and that price covers everything. The price per square foot is generally highest with this sort of lease.
What is a Modified Gross or Modified Net Lease?
It’s a little different from a full-service gross lease because the tenant has to take on more financial responsibility with a modified gross lease or modified net lease deal. The tenant pays the base rent at the beginning of the lease and also contributes to some of the property’s other costs. What is modified depends on the specific agreement, but is likely some portion of taxes or insurance, or utilities, in some situations. Along with taxes and insurance, the landlord takes care of the shared areas of the building and keeps them running. This is called common area maintenance, or CAM.
What is a triple net lease?
A triple net lease is the most common type of business lease, and for good reason: it helps both landlords and owners in big ways. In a triple net lease, the landlord splits the costs of shared area maintenance, property taxes, and property insurance among all the tenants in an equal way. A gross or full-service lease is different from this type of deal. A net lease can also be one of these two other types:
Single net lease
The tenant is responsible for both the rent and the property taxes that are associated with the space when the lease agreement is designated as a single net lease. The landlord is responsible for covering all other operating costs.
Double net lease
In a double-net lease, the tenant pays rent and a portion of two of the most important types of running costs. Usually, these are property taxes and insurance. All repairs and upkeep are paid for by the landlord or owner. In a space with more than one tenant, this is the most common type of lease. In this case, a tenant who gets 10% of the building must pay 10% of the property taxes and insurance.
Weigh your options
There are several pros and cons to leasing out commercial real estate. Let’s dive into a handful.
Pros:
- Regular income: Leasing out commercial property can provide a steady stream of income for the property owner.
- Tax benefits: There are a number of tax deductions available for commercial property owners, such as depreciation.
- Liquidity: Renting out commercial property can provide liquidity for the property owner, allowing them to invest in other properties or ventures.
Cons:
- Tenant turnover: Finding and retaining tenants can be a challenge, particularly in a weak economy.
- Risk: There is always the risk that tenants may default on their rent or cause damage to the property.
- Maintenance: The property owner is responsible for maintaining the property and making repairs, which can be costly.
- Additionally, property owners need to consider factors like local economic conditions, saturation of the commercial real estate market and other related expenses.
Mitigate Risk with STRATAFOLIO
Better management of your portfolio and tenants will help mitigate some of the risks involved in renting commercial real estate. Here are a few ways STRATAFOLIO can help:
- Tenant management: STRATAFOLIO allows property managers to track tenant information, such as contact details, lease agreements, and rental payments. It also provides tools for managing tenant complaints and work orders.
- Accounting and financial management: Our software provides tools for tracking income and expenses, creating invoices, and generating financial reports through our integration with QuickBooks.
- Building and maintenance management: STRATAFOLIO allows property managers to keep track of maintenance requests and vendors, and provides an audit trail of work performed.
- Lease management: Our software provides tools for creating, managing, and renewing lease agreements, tracking rents and CAM expenses, and tracking lease expiration dates.
- Reporting and analytics: STRATAFOLIO can generate various reports on occupancy, revenue, expenses, and other data that can help property managers to make informed decisions.
Overall, STRATAFOLIO can help property managers and owners streamline the process of managing commercial properties. It can provide efficiencies by automating several routine tasks, managing and analyzing data, and improving communication and access to information.
Contact us today for a personalized meeting to see how we can help you combat the risks and set you and your portfolio up for success.
