Navigating Commercial Leases

Most people have experience with residential leases, and commercial leases have many things in common with their residential counterparts. However, commercial leases contain more requirements than what you'll find in a residential lease, and they can be overwhelming if you've never seen one before. This article will discuss the main commercial lease forms and their requirements, along with answers to some miscellaneous questions.

Say you've decided to be an entrepreneur. You've created a stellar business plan, built up capital, cut the red tape—but you don’t have a workspace. If you don't have experience with commercial leases, you might not know where to begin. Let’s go over some of the common lease forms and their requirements:

Gross Lease: In a Gross Lease, things are going to be set up very similarly to a residential lease. You’re going to pay a fixed rent each month, which might be referred to as gross rent. You will also have restrictions on the use of the leased space and common grounds, and most alterations will require signed approval from the owner. Additionally, you may have to pay for some or all of the utility costs.

Net Lease Forms: There are three standard types of Net Leases: a Net Lease, a Double Net Lease, and a Triple Net Lease. 'Net' is used because you will be paying for operational expenses on behalf of the building owner as well as rent, which reduces the rent amount. The rent will be referred to as base rent, and will be lower than gross rent for a comparable building being leased on a Gross Lease. In a Net Lease agreement, it probably won't mention anything about being a 'Net Lease', but the three types of Net Leases have common requirements:

Net Lease (NL): In a NL, you are going to be responsible for the base rent each month, and you'll also be required to pay for the building's property taxes. Again, the base rent you pay will be less than a comparable building that is being leased through a Gross Lease, as you will also be paying for the taxes. 

Double Net Lease (NNL): In a NNL, you are going to be taking on additional responsibilities. On top of base rent and property taxes, you'll also have to pay for the building's insurance. Being responsible for those additional expenses will make the base rent seem lower than a NL or Gross Lease.

Triple Net Lease (NNNL): Similar to the NNL, in a NNNL you will be responsible for base rent, property taxes, and insurance costs, but you will also be responsible for building maintenance. In a NNNL, the scope of ‘building maintenance’ varies, so make sure to read exactly what you’ll be liable for. And again, the base rent on a NNNL will typically be even lower than a comparable NNL, NL, or Gross Lease.

Miscellaneous:

‘How do the operational expenses work in a Net Lease if the building has multiple tenants?’

If a building with multiple units is being leased using a Net Lease, then each unit is probably paying a pro-rated amount based on each unit’s square footage. A pro-rated ‘operating expense’ will be pre-set for each month, based off of a yearly estimate.

‘How do I, as a tenant, get insurance for the building?’

Note that most building owners require tenants to purchase a General Liability policy for the tenant's business before they will even give you a set of keys. As for the building's insurance, you’ll have to take out a Commercial Property policy on the building, naming the owner as the insured. You cannot take out a policy on the building and have yourself as the named insured because you have no insurable interest in the building (no ownership). Some owners will get the policy themselves and pass the bills onto you, while other building owners will require you to find a policy that meets their expectations. In multiple tenant buildings, the owner of the building is most likely going to get the policy and pass on the costs.

'How do I know that my lease is fair?'

You may be able to directly compare leases, or internet listings may have the lease details shown. Your insurance agent may be able to check out the insurance requirements in the lease, but licensed attorneys and real estate agents will be the best judge.

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Colten Zamrzla, CPCU

Colten first started in the insurance industry in 2010. He then pursued a Bachelor's degree in Finance & Insurance from the University of Nebraska at Lincoln. Once graduated, he immediately started studying for the CPCU and achieved it in just shy of a year. He is solely focused on commercial insurance, able to assist all types of businesses and nonprofits in risk management.

Colten has dedication and passion for his clients and the insurance industry as a whole. He dedicates time to furthering his knowledge on all things business and insurance, and he volunteers for the Independent Insurance Agents of Nebraska, a state-based trade association.