You may prefer to work at home and not rent office space. Or you may prefer to minimize the risk of leasing and rent an office in an executive suite business centre. However, if you decide to take the jump and rent office space and commit to a number of years, you should be aware of the variations available to you. That way you can assess the pros and cons and negotiate a lease that is suitable for your present and projected business needs.
Possibly you may wish to buy a commercial property and become a landlord. Whatever you plans, here is an explanation of the options.
The following types of leases are the most common ones. The name used to describe each lease may vary in your region, but the concept behind the description is the same.
Net lease
In a net lease situation, the tenant pays a flat rate which is all-inclusive of heat, light, water, taxes, common area use, ground maintenance, building repairs, etc.
Net lease plus taxes
This is similar to the net lease, except that there is an agreed-upon extra expense for taxes. Any taxes over and above the base tax rate are passed on to the tenant totally or partially, depending on what is negotiated. The extra cost for taxes would normally be passed on once a year once the tax assessment has been obtained and paid by the landlord.
Triple net lease
In this type of lease situation the base rent is a certain price (for example, $10 per square foot of area rented), but the tenant is responsible for paying his proportionate share of all the extra charges incurred by the landlord. These are normally outlined in the lease agreement. These extra costs or operating expenses could add up to the equivalent of another $6 or $7 per square foot, for example. The total monthly rental outlay would therefore be approximately $16 per square foot. The operating costs may fluctuate each year based on taxes, maintenance, insurance, administrative and management costs. When one refers to a cost per square foot for lease space, it is quoted on an annual basis; to calculate the monthly rent, you multiply the square footage of the premises by the cost per square foot, and divide by twelve.
Index lease
This type of lease is one in which the rent varies based on a formula of costs incurred by the landlord. For instance, the lease may vary every year based on the cost-of-living index to account for inflation.
Variable lease
A variable lease is one in which the annual rent is agreed upon in terms of how it is calculated, but the monthly rent may vary depending on the seasonal nature of the cash flow of the business. For example, there could be a very low or no-rent period of three or four months because business activity is slow. The rent for the remaining months of the year would be high, to compensate for the period when the business was unable to pay rent.
Graduated lease
This type of lease requires an increase in rental payment every month for a specified period of time. This is usually done to assist a business in its first year of start-up, so that the monthly payments are related to the increase in cash flow and revenue of the business. At the end of the graduated period, the rental payments by the tenant would then be at a fixed rate, usually as in a net or triple net lease.
Percentage lease
The percentage lease is commonly used in the renting of retail stores in shopping centres. The landlord therefore obtains the benefit that the tenant obtains in terms of the large traffic volume going through the shopping centre, which the landlord has established. Some of these types of leases are based on net profit and others on gross profit, with a base minimum. The landlord also requires stringent accounting and reporting controls. In effect, they have become your quasi-business partner. Such a relationship can be risky and de-motivating. It depends on the deal.
Always make sure that you have a lawyer, experienced in leases, give you objective and candid feedback on the lease terms. Leases are full of jargon that has significant legal implications. You want to understand every aspect of the terms of the proposed lease. The landlord’s lease is almost invariably one-sided in the landlord’s favour. You need to have your lawyer negotiate a more balanced lease on your behalf, if at all possible. Otherwise, take your business elsewhere.
