A lease is a contract between an owner and a user of property. In business lease agreements, the owner (lessor) receives financial compensation and in exchange, the tenant (lessee) is given the right to operate his or her business on the property. There are many different types of property lease arrangements and many different considerations that business owners should weigh before entering into such a contract. But leasing is very popular with small business owners: such arrangements allow new or financially-strapped businesses to divert their capital to other business needs. Indeed, many small businesses operate in leased facilities for their entire existence. Leasing property, of course, may itself be a small business activity.
A Commercial Lease is a type of lease designed for business purposes and covers items including security deposits, taxes, expenses, obligations for repairs and construction of the premises to be leased. There are four major categories of commercial leases namely, gross lease, modified gross lease, triple net lease and absolute net lease. Under a gross lease, the tenant pays base rent and the landlord absorbs all costs for common area maintenance (“CAM”), real property taxes, landlord’s insurance, and other charges for the operation and maintenance of the property. Hence a tenant need not have to pay operational expenses in a gross lease. A modified gross lease requires the tenant to reimburse landlord for “pass through” costs over a stated expense stop or base year. A triple net lease requires the tenant to reimburse landlord for CAM, real estate taxes, and landlord’s insurance. An absolute net lease is a form of lease where the tenant is the sole occupant of the leased property, for instance a restaurant. In such a case, the tenant has to pay all the costs of maintenance and operation of the property, including capital expenditures. Absolute net lease requires the tenant to absorb all costs and expenditures and major repairs. Commercial leases are granted for various purposes including office, retail, warehouse, pad, or “ground”. Pad or ground leases are often used for restaurant premises or for premises where the tenant will be responsible for building and maintaining the structure. Usually, a commercial lease is given for a term of five to twenty years with fixed increase in base rent.
When involved in lease negotiations or any real estate transaction, it is highly recomended, and in some states required that you obtain the services of an attorney versed in real estate. At times many balk at the cost of an attorney, yet they often save you money in the long run by having you avoid many pitfalls. Keep in mind, with most real estate transactions that you do this (lease or buy) a few times, and the the one selling or leasing does this often.
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