The Facts | Commercial Leases

Posted by on May 16, 2016 in Blog - Commercial Investment Properties | 0 comments

The Facts | Commercial Leases

Commercial Leases are Like Snowflakes

No Two are the Same One of the unfortunate truths of our business is that there is no standard commercial lease. Every lease and every property is different and how you structure those leases makes a huge difference in the income potential of your property. Many investors struggle with commercial leases just because of the unfamiliarity. By now residential leases are easy because we’ve all lived in houses, apartments, etc. for years. We’ve all been to the store, we’ve usually just never owned it.

Mastering commercial leases isn’t just to maximize profits, it’s for the building owner’s protection as well. Commercial leases are much riskier than single family and multi-family agreements. You need to know what costs to pass on to commercial tenants in something like CAM (common area maintenance) expenses, where landscaping, electricity and management fees don’t always have to be your responsibility.

The Goal of a Commercial Lease

Commercial leases help to transfer the risk from the land owner to the tenant. That being said, ͞it’s got to be in the lease which is why it’s important that your provisions for charge-backs (new roof, damage repair) are well drafted into the lease. You provide land and a building for a business to do commercial work, it’s their responsibility to keep that property running.

Your commercial lease also has huge tax implications and building modification ownership as well. For example, you supply the shell for the business to exist in but the tenant owns any improvements they make ‘building out’ the property to satisfy franchise requirements or just making the property able to accommodate their boutique, car wash, retail store, etc. If you draft your lease so that you own these build outs, you can depreciate the building and materials at a much shorter period of time offering huge savings at tax time. You’ll of course have to reimburse the tenant a percentage of their expenses with this agreement, but the tax savings are worth it over the long term.

The Seemingly Minute Details of the Lease are the Key

Some other hot buttons that need to be included in commercial property leases have to deal with the building being considered public accommodations. Numerous property owners have been sued for non-compliance with issues like ADA (Americans with Disability Acts). Your lease needs to include who is responsible for compliance (you or tenant) to avoid litigation.

Your lease should also walk the fine line of being restrictive so you know what type of business is entering the building but also flexible enough so that the property is filled. This is something inserted into the lease so that the original tenant can in turn sublease the property whether it’s a restaurant that shuts down well before the lease ends or a gas station that wants to include another business such as Subway.

The mantra among commercial leases is that it’s better to write it in than to pay for it. Your lease needs to cover every possible thing that could be encountered over the course of that business occupying the building. It’s very important to have the draft written up by a legal team familiar with commercial lease drafting. To learn more about the subject, check out our podcast about leases with legal expert Elise Batsel.

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