For a business to thrive, it’s not enough to choose the right property, you also need to pick the right lease. A good landlord/tenant match in commercial real estate requires a lease that benefits both sides.
For many businesses, their physical location has a direct impact on their revenue and overall success. Leasing commercial space is a big decision that requires hefty investments. They are often long-term and costly. A business lease should not be taken lightly. Therefore, while renting business space, it is not only necessary to research the market well but also have a fair idea about the types of commercial leases available in India.
Commercial real estate leases in India are usually term-based. They have a particular time after which the agreement expires. At present, there are three basic types of commercial real estate leases available in India. While the terminologies may vary from place to place, having a basic overview will help you to negotiate the best possible deal.
Unlike a residential lease, a commercial lease is an agreement between a tenant and landlord outlining the property strictly for commercial or business use.
A Gross lease is also popularly known as a full-service lease. It is a type of lease where the landlord pays all the property expenses out of the rent received from the tenant. The list of such expenses includes taxes, utilities, insurance, and maintenance (in and outside), cleaning. While the landlord assumes all the responsibility of the building, the tenant has to solely concentrate on the business. This is one of the significant benefits of a gross lease, which is majorly used for multi-tenant buildings.
This isn’t to say that costs aren’t passed onto these tenants, however. Additional costs are often referred to as the “load factor.” Rent would be substantially less if this load factor wasn’t included. The load factor is typically a percentage of costs associated with maintaining common areas, such as a lobby, and the percentage is commensurate with the percentage of the overall building that the tenant occupies as his own premises.
A net lease is a commercial real estate lease wherein, the tenant not only pays for his or her occupied space but also pays for all or a certain part of the usual costs. These costs are generally associated with the operation or maintenance of the property. The list of such usual costs includes taxes, property insurance, property management fees, or payment toward utilities. There are 4 types of net leases :
A single net lease refers to a lease that requires the tenant to pay the rent along with a portion of the property tax. Rest all charges are handled by the landlord, except utilities and janitorial services, which are again to be borne by the tenant.
Under a Double net lease, the tenant has to pay a certain share of property taxes and the insurance along with the base rent. While the utility charges are to be borne by the tenant, the landlord is responsible for structural repairs and common area maintenance.
Also known as the Net Net Net Lease (NNN), a triple net lease is a lease type wherein the tenant has to pay not only for the rent but also bear the brunt of all the additional expenses on a proportionate basis. Such a type of lease is more landlord-friendly. Therefore, while signing a NNN lease, a tenant should carefully review the document and negotiate well on the amount that can be raised annually. One of the major benefits of a NNN lease is that it allows the tenant to have a fair idea about the operating expenses that have been incurred. Moreover, the benefit of cost savings is passed on to the tenant rather than the landlord.