101s of Commercial Leasing
What are NNNs?
NNNs, or Triple Net Leases, are a type of commercial lease agreement where tenants are responsible for paying not only the base rent but also their share of the net costs associated with the property. These costs typically include property taxes, insurance, and common area maintenance fees, hence the term “triple net.” With NNN leases, tenants have more financial responsibility for the property’s operational expenses, while landlords typically have fewer ongoing expenses to manage. Note that NNNs are a pass-through cost. You pay an estimate towards the actual costs every month which are then reconciled annually. h. NNNs are subject to increase every year, and usually do. Make sure to ask for a breakdown of the NNN estimate before you sign a lease.
How do I calculate my monthly rent?
Calculating monthly rent in a commercial lease involves several factors, including the base rent and additional charges such as NNN expenses. To calculate your monthly rent, add the base rent (usually a price per square foot per year) to the NNN expenses (also a price per square foot per year) and multiply that by the total rentable square feet of your premises. Then divide the total by 12 to determine the monthly amount.
Why do I need to show financials?
Landlords often require tenants to show financials as part of the leasing process to assess the tenant’s ability to pay rent and fulfill their financial obligations under the lease agreement. Financial documents such as income statements, balance sheets, and credit reports provide landlords with insights into the tenant’s financial stability and creditworthiness. Landlords use this information to mitigate the risk of leasing to tenants who may struggle to meet their financial commitments, thereby safeguarding their investment in the property.
How does TI work?
TI, or Tenant Improvement, is a common aspect of commercial leasing agreements whereby landlords provide funding, or allowances, to tenants to customize or renovate the leased space to suit their specific business needs. TI allowances can cover expenses such as interior build-out, installation of fixtures, and upgrades to infrastructure. The terms of TI arrangements vary depending on the lease agreement, with landlords typically offering TI allowances as part of lease negotiations or incentives to attract tenants. TI allowances can be provided as a lump sum or amortized over the lease term, and tenants are often required to submit plans and budgets for approval before commencing any improvements.
How long is a typical commercial lease term?
The typical length of a commercial lease term can vary widely depending on factors such as location, type of property, industry norms, and the preferences of landlords and tenants. Generally, commercial lease terms range from three to ten years, with five years being a common standard. However, some leases may be shorter or longer, depending on the specific needs and circumstances of the parties involved. Shorter lease terms offer flexibility for tenants, while longer terms may provide stability and potentially lower rental rates.
How long does it typically take to find a commercial space for my business to lease?
The timeframe to find a commercial space for lease can vary based on factors such as the size and location of the desired space, market conditions, and the complexity of your business requirements. On average, it may take several weeks to several months to find and secure a suitable commercial space. The process typically involves searching for available properties, touring potential spaces, negotiating lease terms, conducting due diligence, and finalizing the lease agreement. It’s essential to start your search well in advance and work with experienced real estate professionals to streamline the process and find the right space for your business.
What should I budget for as I prepare to lease a space?
As you prepare to lease a commercial space, it’s crucial to budget for various expenses beyond just the base rent. Some common costs to consider include:
- Rent: Base rent and any additional charges such as NNN expenses, utilities, and taxes.
- Security deposit: Typically equivalent to one to several months’ worth of gross rent.
- Tenant improvements (TI): Budget for any customization or renovations needed to fit out the space for your business requirements. Note that most municipalities require tenants to hire licensed architects and contractors and pursue permits for all TI work.
- Legal fees: Costs associated with hiring an attorney to review the lease agreement.
- Moving expenses: Costs related to relocating your business operations to the new space.
- Operational expenses: Budget for ongoing expenses such as utilities, maintenance, and insurance.
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