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Typical Commercial Lease Terms That Everyone Should Know - YouTube
Channel: Tyler Cauble
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during your search for commercial space
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i'm sure that you've come across
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a lot of commercial real estate jargon
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but you don't need to worry
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you actually don't have to know
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everything this video will cover the
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basics of commercial leases including
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common lease structures
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important lease causes and the most
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common delivery conditions of commercial
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leases by the end of it you won't know
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everything about commercial leases but
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you should know enough to be dangerous
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a first lease structures commercial
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leases can be structured in a variety of
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ways
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depending on the type of property type
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of business and number of tenants
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here are a few of the most common lease
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structures triple net or net net net
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a triple net lease is one of the most
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common lease structures you'll find it
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requires the tenant to pay base rent
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along with the three nets which are
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property taxes
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building insurance and common area
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maintenance with triple net leases
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the tenant incurs all expenses related
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to the property but the landlord's not
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quite off the hook they are still
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responsible for maintaining the
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structural components such as the
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structural walls foundation and roof of
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the building the only time the landlord
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is completely free of responsibilities
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is when the tenant has an
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absolute net lease where the tenant is
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responsible for the structural
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components of the building too
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to calculate rent for a triple net lease
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you take the estimated annual expenses
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and add that number to the price per
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square foot multiplied by the rentable
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square footage of the space
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full service gross lease or fsg a
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full-service gross lease requires the
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tenant to pay a base rent while the
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landlord incurs all the expenses related
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to the property sounds pretty great
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right
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it can be great considering that the
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tenant knows exactly what they're paying
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every month but it can also be a
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double-edged sword
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the property owner will probably
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significantly increase the base rent of
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the space with a full-service gross
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lease as a means of risk mitigation on
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their part
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they want to be as monetarily insulated
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as possible from any unexpected expenses
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to calculate the rent for a full service
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gross lease you simply multiply the
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price per square foot by the square
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footage of the space
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modified gross or mg a modified gross
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lease requires the tenant to pay
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a base rep along with only some of the
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operating expenses for example a group
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wants to open an art gallery in a space
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that you have for lease
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you know that the electric bill will be
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significantly higher than normal so you
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create a modified gross lease where the
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group pays monthly rent
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along with their electric bill
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calculating the rent for a modified
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gross lease is
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almost the same calculation for finding
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full service rents you multiply the
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price per square foot by the square
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footage of the space
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and then add this number to the amount
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of the expenses that you will incur in
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addition to rent now for some lease
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causes there are
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many different types of causes within a
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commercial lease while it is important
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that you have your lawyer review the
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lease you should not be totally green to
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these commercial documents
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here are a few important causes to keep
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in mind the sublease clause
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subleasing is where a tenant leases
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unused space and their release agreement
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to another tenant the tenant's lease
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agreement with the sub-tenant is
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independent of the lease agreement
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between the tenant and the landlord
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often referred to as the right to sublet
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clause the
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clause states that the tenant does not
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have permission to lease a portion of
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the space
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in their lease agreement to another
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tenant unless consent is given by the
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landlord
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have your attorney review your lease
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some landlords will charge a sublease
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fee
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this clause is important because any
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additional space that you do not use but
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is included in your lease could provide
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you with additional income or the
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ability to get out of the space
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if you need to the exclusive right
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clause the exclusive right or
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exclusivity clause is often found in
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many retail leases but can also be seen
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in any industry
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it gives the tenant the right to be the
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only business that sells a certain
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product or provides a specific service
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for example if you decide to open a nail
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salon in a prominent strip mall you
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wouldn't want there to be another nail
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salon
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because they're a competing business and
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have the potential to take some of your
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customers so go for that exclusive
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rent escalation when leasing a space
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your rent can increase on a yearly basis
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or during any renewal options this is
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what the rent escalation clause covers
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the rent escalation clause explains how
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much of an increase in rent a tenant
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will be subject to
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for example a landlord may state that
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there will be a two percent annual
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increase in rent or it may be that the
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rent increases by five percent
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every two years every lease can and
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likely will be different the roon
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escalation clause is one of the most
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important causes because in the long run
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those annual two percent increases can
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greatly affect your overall costs of
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tenancy
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now for delivery conditions commercial
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spaces can be delivered in a variety of
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conditions
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sometimes you may lease a space that is
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basically turnkey and move-in ready
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whereas you can also have a space that
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is
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nothing more than the skeleton of the
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building let's dive into a few of the
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most common delivery conditions for
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commercial leases vanilla shell or
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white box a vanilla shell lease or white
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box condition can be one
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of the sweetest deals you get build out
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costs for vanilla shell leases are what
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makes them so desirable
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you spend the least amount if any during
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the build out of a vanilla shell lease
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compared to any other condition
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your costs for build out mostly reflect
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the cost of your tenant specific
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amenities
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here are the finishes that you can
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expect in a vanilla shell lease
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finished or drop ceiling finished
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restrooms hvac and ductwork
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lighting elevators etc but this does
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come with a cost
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you should expect a higher base rent
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since the property is being delivered in
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an almost move-in ready condition
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cold dark shell cold dark shells are
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exactly what they sound like
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you can expect these spaces to be down
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to the studs of the building it's
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essentially the skeleton of the building
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so a cold dark shell does
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not contain any of the following hvac
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electrical plumbing or elevators think
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about this
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cold dark shell cold because there's no
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heat dark because there's no lighting
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shell because it's in shell condition
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but why would you want a cold dark shell
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lease aren't the build-out costs going
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to be high well yes
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cold dark shell build out costs are
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higher than any other delivery
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conditions
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but there is an incentive the landlord
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generally offers a lower rent and a
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higher tenant improvement allowance
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since the build out costs will be high
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for the tenant second generation
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second generation spaces are the
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hand-me-downs of commercial real estate
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what makes second-generation leases so
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attractive is that it could require
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little to no build-out costs
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depending on your business and the
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previous tenant for example
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if you're looking to open a restaurant a
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second generation space where the
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previous tenant was also a restaurant
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may be perfect for you
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why because the space is likely to be
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outfitted with the proper ventilation
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system for your kitchen
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all of the plumbing and everything else
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that you would need for a restaurant
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you may find that the lease includes
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commercial stoves and refrigerators as
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well
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it's not uncommon for a new tenant of a
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second generation space to slap paint on
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the walls
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lay down new flooring and open up for
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business a downside however of a second
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generation lease is that it's going to
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reflect the previous tenant also
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if the space was previously leased to a
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long-term tenant you may need to make
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sure the space is up to code
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by now you know the important parts of
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commercial leases but there is still a
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ton to learn
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especially if you're an entrepreneur
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looking for commercial space for your
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business
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did i further into commercial leases
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check out our tips for releasing
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