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For many entrepreneurs signing a lease seems like renting an apartment – a Tennant/Lessee agrees to pay a certain fee to Lessor/Agent per month. Right? Nothing could be further from the truth.

The first lease many entrepreneurs sign is usually short-term because who knows if the business is even going to work. But say it does and now it’s starting to grow — you need a new spot either for a better location, better facility or larger space. The second lease you sign is often pivotal in the survival of your business. The terms of your lease can act as a slow leak in your tires or can leave the door open to incur huge expenses when the unexpected happens. Leases are legal contracts and should be examined closely and, more importantly, understood completely before you even consider signing one.

There are different types of commercial leases and a number of abbreviations that differ in meaning and usage depending on who’s using them. When it comes to commercial leases, there are several basic structures that equate to what the tenant is responsible for paying besides rent each month:

For many entrepreneurs signing a lease seems like renting an apartment – a Tennant/Lessee agrees to pay a certain fee to Lessor/Agent per month. Right? Nothing could be further from the truth.

The first lease many entrepreneurs sign is usually short-term because who knows if the business is even going to work. But say it does and now it’s starting to grow — you need a new spot either for better location, better facility or larger space. The second lease you sign is often pivotal in the survival of your business. The terms of your lease can act like a slow leak in your tires or can leave the door open to incur huge expenses when the unexpected happens. Leases are legal contracts and should be examined closely and, more importantly, understood completely before you even consider signing one.

There are different types of commercial leases and a number of abbreviations that differ in meaning and usage depending on who’s using them. When it comes to commercial leases, there are several basic structures that equate to what the tenant is responsible for paying besides rent each month:

  • Single Net Lease, Net Lease: tenant only pays utilities and property tax; landlord pays maintenance, repairs and insurance.
  • Net-Net, or Double Net Leases: tenant is responsible for only utilities, property taxes and insurance premiums for the building; landlord pays maintenance & repairs.
  • Triple Net Leases: tenant responsible for all costs of the building, except the landlord is generally responsible for structural repairs.
  • Full Service Gross, or Modified Gross Lease (also called modified net lease): split structural repairs and operating expenses (property taxes, property insurance, common area maintenance (CAM), and utilities) between the tenant and landlord called ‘base rent.’

Full Service or Modified Gross are the most common type of lease for multi-tenant buildings. With these, the rent does not increase if operating expenses do, but on the flip side, the rent does not decrease if the operating expenses drop in a year. The difference in these comes down to what “gross” means in the lease – different leases can include or exclude certain operating expenses (it’s common to see all janitorial and electric utility costs for the rented space paid for by the tenant separately). This additional rent, or “base rent,” derives from a formula that determines the amount of and types of operating expenses paid by the tenant that can increase over the term of the lease.

There are many different commercial leases and terms, but you’ll find that the devil’s in the details. Entrepreneurs probably sign more Modified Gross Leases than any other. Here are some examples to watch out for to help you avoid becoming another one of the countless businesses lost to unforeseen issues related to commercial real estate. There is probably no better place to look for these real estate lease examples tripping up entrepreneurs than New York City.  CPA and award-winning author Mike Bivona has owned numerous commercial rental properties throughout New York City and Long Island over decades. He told me about a particular building he owned in which one of the tenants had a bathroom in their office. Not totally uncommon, but after the owner had left for the day , someone flushed a clogged toilet causing water damage down two floor levels. Guess who got stuck with the cleanup and repair bills? The tenant whose toilet overflowed.

  • Single Net Lease, Net Lease: tenant only pays utilities and property tax; landlord pays maintenance, repairs

    and

    insurance.

  • Net-Net, or Double Net Leases: tenant is responsible for only utilities, property taxes and insurance premiums for the building; landlord pays maintenance & repairs.

  • Triple Net Leases: tenant responsible for all costs of the building, except the landlord is generally responsible for structural repairs.

  • Full-Service Gross, or Modified Gross Lease (also called modified net lease): split structural repairs and operating expenses (property taxes, property insurance, common area maintenance (CAM), and utilities) between the tenant and landlord called ‘base rent.’

Full Service or Modified Gross are the most common type of lease for multi-tenant buildings. With these, the rent does not increase if operating expenses do, but on the flip side, the rent does not decrease if the operating expenses drop in a year. The difference in these comes down to what “gross” means in the lease – different leases can include or exclude certain operating expenses (it’s common to see all janitorial and electric utility costs for the rented space paid for by the tenant separately). This additional rent, or “base rent,” derives from a formula that determines the amount of and types of operating expenses paid by the tenant that can increase over the term of the lease.

There are many different commercial leases and terms, but you’ll find that the devil’s in the details. Entrepreneurs probably sign more Modified Gross Leases than any other. Here are some examples to watch out for to help you avoid becoming another one of the countless businesses lost to unforeseen issues related to the commercial real estate. There is probably no better place to look for these real estate lease examples tripping up entrepreneurs than New York City.  CPA and award-winning author Mike Bivona has owned numerous commercial rental properties throughout New York City and Long Island over decades. He told me about a particular building he owned in which one of the tenants had a bathroom in their office. Not totally uncommon, but after the owner had left for the day , someone flushed a clogged toilet causing water damage down two-floor levels. Guess who got stuck with the cleanup and repair bills? The tenant whose toilet overflowed.

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