In the excitement of starting a business or opening a new location, don’t overlook the details in that commercial real estate lease you’re about to sign. There can be quite a few hidden costs you might not be aware of.
Here’s what you need to know when leasing retail space:
Type of lease. Your lease might be net, triple net, gross, or full-service gross. Each has a unique mechanism for handling expenses and who is responsible. By the way, these expenses are in addition to your base rent. As an example in most NNN leases, you, as the occupant, are responsible for all the costs in addition to your base rent. In a gross lease, the landlord typically maintains, repairs, and replaces the roof – but most other expenses are yours – they just inflate your base rent.
Base rent increases. The base rent you negotiated generally is only for the first year. Typically, in succeeding years your rent will escalate — often by 3 or 4 percent. When times aren’t as robust, owners are willing to negotiate a base rent that doesn’t tick up throughout the term. These annual increases can catch you off guard, and they are one of the many lease events you can track in Leasecake.
Abated rent. If you were successful in convincing your landlord to concede some months of base rent as an incentive for your tenancy, good for you. Just know if should fail to fulfill your obligation for the full term, you may be liable for repayment of the abated rent. As an occupant, changing the word “abated” to “free” may limit your repayment exposure.
Operating expenses. Property taxes, insurance on the building, maintenance of the foundation, roof, and walls fall into the category of operating expenses. As the tenant, you are responsible for paying these expenses – in addition to your base rent – when they are due or reimbursing the owner for these expenses. Some owners prefer to estimate these expenses for the upcoming year and then bill you monthly for the costs. However, if the owner overestimates the costs, you should have a refund coming. The opposite is true if he or she miscalculates the other way — then you owe. These expenses increase over the term of your lease, and owners typically are afforded the right to pass through these annual increases.
Common area maintenance. Sometimes referred to as C.A.M. charges, these little costs are for mowing the grass, watering the bushes, trimming the trees, sweeping the parking lot, emptying the trash bin and powering the lights outside.
Repairs and maintenance. The heating, air conditioning, warehouse sprinkler system, plumbing, and roof (if a NNN lease) are all yours to maintain and repair. So what happens if one of these systems needs a full replacement? That can be a lot of dough! Generally, the owner must replace it if the cost to repair it exceeds a certain percentage. However, the owner may bill you for the replacement over a period of years.
Liability insurance. The cost of insuring the building against fire and destruction is billed to you as the tenant. You must also carry a level of liability, contents, and loss of rent coverage.
There’s no way to eliminate fees beyond your base rent. Those charges are just the cost of doing business. But there are a few things you can do to limit your exposure:
- Ask that your C.A.M. charges be capped at a certain annual increase.
- Before you sign the lease, ask for a complete accounting of ALL the expenses in addition to your base rent so you avoid surprises.
- Keep track of lease renewal dates, rent escalations, and critical lease clauses by using commercial real estate lease management software.
To learn more about how Leasecake can help, schedule a demo today.