TKOH-Leasing Property

Anybody who wants to get involved with commercial properties must understand that renting commercial space is a big responsibility and can be significantly different from renting residential apartments. The success or failure of your cash flow and future value of the property will ride on certain terms in the leases. TKOH works with each member to make sure they understand what the are getting into as far as leases and what they are obligated to whether it be commercial or residential and what your rights may be.

Leases are a legal document fully enforceable by both parties – the tenants and the landlord. Note that when you purchase a property, you also purchase the leases as they are written and you will have to abide by their terms. You should have an attorney look at any and all leases before you sign the Purchase and Sale Agreement. Make sure you understand and agree with the basic terms of the leases, such as the amount of rent, the length of the lease, options, concessions, common area maintenance charges (CAM), and the configuration of the physical space to name a few. We will not cover every type of lease or every option or addendum but will give you a basic understanding of the types of leases available and some things you should consider. This is where you need to have an expert on your team.

Commercial leases vs. residential leases

Commercial leases and residential leases are quite different, as described below:

Commercial leases are not subject to most consumer protection laws; for example, there are no caps on security deposits or rules protecting a tenant's right to privacy. And it is easier to evict a business tenant than it is a residential tenant.

Residential apartment leases come in two distinct flavors – yearly renewable and tenant at will – and both are readily available as simple boilerplate forms. Commercial leases however can be extremely complex and as such there is no simple boilerplate standard form agreement per se; almost all commercial leases are customized to the tenant’s, landlord's, and property’s specific requirements. As a result, you need to carefully read every line of a commercial lease agreement, addenda, and options offered to you. They can also be expensive and time-consuming to negotiate because of the customization required for each one.

Overview of leases

Leases can be in place for a long term and are fully binding on all parties. Tenants may even have options that can keep them in control for longer periods of time. It is not easy to break or change the terms of a commercial lease. Many times when a company is sold or goes bankrupt, their leases may still have to be honored by the landlord.

Many businesses may require special features that the property offers or needs to have put in place above and beyond simple space requirements – this can include such items as signage, drive-through capabilities, parking, and safety laws. Payment for these concessions and additional costs can come from either the tenant or landlord. Some landlords may be willing to help pay for these additional costs or even absorb all costs, based upon their desire to have the business as a tenant.

Many leases may have options built into them that allow the tenants to stay on at a known rent in advance after the basic term of their lease expires. There is no limit to the number of options that a tenant can be granted, resulting is tying up a space for a long time.

Some leases can state that the tenant pays for a portion of certain items that are common to all tenants such as parking lot cleaning, and maintenance, snow removal, and landscaping. These types of items are called common area maintenance charges (CAMs) and are very prevalent in commercial leases.

Some long-term leases can have consumer price index increases written into them that give the landlord a minimum yearly (or every three- or five-year) rent increases that are called “bumps”.

Things to consider in commercial leases

There are so many possible items that may need to be negotiated within a lease that it is impossible to list or discuss them all. Below are a number of items that are common to most leases:

· Term of the lease – the length of time that the lease begins and when it runs out. Many leases run three to five years.

· Renewal options provided so the tenant can, if they chose, stay in the property at a specified future rent.

· Rental increases, annually or at some other interval. Increases may be fixed percentage or consumer-price-index-driven.

· Common area maintenance charges for which the tenant may have to reimburse the landlord, usually based on the percentage of the total retail area that the tenant occupies.

· Increases in taxes, water, insurance, or other expense for which the tenant may have to reimburse the landlord if they increase above a set amount.

· Security deposits and terms under which they will be returned to tenant.

· Separate trash pickup or part of the common trash. Certain tenants may generate large amounts of trash, e.g., restaurants, and may have to obtain and pay for their own trash removal.

· Exact measurements of the space that the tenant is renting.

· Rules for signage on common shared sign or in windows.

· Rules regarding who can repair the property. Some landlords allow only certain contractors to maintain their property and require the tenants to use them as well.

· Types of improvements that can be done to the premises and who pays for them.

· Rules regarding subleasing to another tenant and whether lease can be sold.

· Personal guarantee for the lease from an owner of the business.

· Terms for expansion.

· Arbitration rules or settlement rules in the event of a dispute or lawsuit.

· Requirements or liabilities for early termination of lease.

· Considerations concerning the Americans with Disabilities Act (“ADA”) and who pays for them.

· If the lease is a participating lease (where the landlord takes a percentage of the tenants’ sales in lieu of a higher rent), the rules for determining how sales are calculated

· Who pays for utilities.

As you can clearly see, commercial leases can take weeks or months to negotiate, with all the available options and terms that need to be considered and worked into the agreement. It is very important that you find someone with a background in this area, as it is a specialty.

Categories of leases

There are as many different types of leases available, many of them pre-designed to determine the specific terms and considerations that can be added as addenda to the lease, yet it is important to remember that each lease is still fully customizable. One lease type varies considerably from another and has a tendency to be called something different by attorneys, landlords, or real estate agents. Below you will find the most common types. Along with its name and a brief explanation describing its use:

Tenant at will apartment lease: Runs for short terms, usually month to month, and allows either the tenant or landlord the right to terminate the lease with a 30-day notice.

Standard term apartment lease: Usually runs for a yearly term. Some contain a clause to automatically renew.

Gross lease: Tenants pay a fixed amount of rent, and the landlord pays for all other costs of maintaining property. May have yearly or other timely rents increases built into them.

Net lease: Tenant pays the rent plus some portion of the maintenance fees, insurance premiums, common area expenses, and other operating expenses. Landlord may pay for all building improvements and major repairs such as roofs.

Double- net lease: Tenant is responsible for the majority or all of the expenses with the exception to the roof and structure, which are the landlord’s responsibility. The landlord may also be responsible for other items such as HVAC and parking lot maintenance.

Triple-net lease: Usually written for single tenant or freestanding building. Tenant is responsible for every expense and cost associated with the space. These types of leases are very much in demand because the landlord does little more than just collect the rent and pays no bills.

Participating or shopping center lease: Tenant pays a base rental rate as well as a certain percentage of their gross sales. They can still be net, double- or triple-net lease rules written into the lease as well.

Ground lease: Tenant leases raw land and then constructs a building at their own expense but to the landlord’s exact specifications. Tenants usually pay for all ongoing expenses and repairs to the property as well. After the end of the lease term the improvements on the property (referred to as leasehold improvements), including any building or buildings, will revert back to the landowner.

Mixed lease: These a variations of common lease forms and may cover different terms for different spaces such as an office and warehouse space in the same facility but each has a separate rental amount, terms, and options.

What we do is offer a unique service to our members that save them time, money and headache, offering a wide variety of services including information. That headache can last you years to get over if you do not understand what you may be getting into. We work for our members in all aspects of each members life if you seek that advice.

Our hope is that each will have a safe and sane life, filled with opportunities instead of problems. It all starts with Cognitive Restructuring and learning why we do some of the things we do and what motivates us to do those things. Once we understand we can learn to ask the right questions. It is for our well being and growth.