Welcome to the Topic “Commercial Real Estate Leases”
Finding the correct office space for lease in Chicago is just as crucial as finding the right location if you’re looking to buy commercial property in Chicago. These lease agreements are more involved than a regular residential lease because they include items such as tenant improvements, operating expenses, escalation and abatement in addition to monthly rent payments.
Before you start looking for a property, it’s critical to understand the many types of commercial lease agreements because choosing the wrong one could land your company in financial trouble.
Commercial leases may appear basic, but numerous methods share commercial property expenses. Tenants are only responsible for a set monthly rent in some forms of commercial leases, while landlords are responsible for taxes, insurance, maintenance, and other costs.
However, it’s far more normal for a lease to split extra expenses between the tenant and the landlord somehow, and you should be aware of this split before leasing commercial property.
So before you sign a commercial real estate lease, learn about the many forms of commercial leases that are available.
Lease with full service
- Under this simple contract, the tenant is accountable for a specific rent sum and almost nothing else. In a full-service lease, the landlord is responsible for property taxes, insurance, maintenance, and even utilities. Because the landlord is absorbing so many expenditures, a gross commercial lease will charge the tenant a higher rate.
- In this, the tenant is responsible for both the monthly rent and a percentage of other costs, such as property taxes, insurance, and upkeep. The amount a tenant pays toward these costs is determined by the amount of space they rent. The leasing agreement will describe how it is computed. Because the fees of these leases often increase over time, they can be a little unpredictable for a renter. Make sure you’re prepared for those cost increases if you sign a net lease.
There are three types of net leases, each with a different expenditure division.
- Tenants on a single net lease (N lease) are responsible for monthly rent and only one additional expense: a percentage of property taxes.
- In a double net lease (NN lease), the tenant is responsible for the monthly rent and two additional costs: a percentage of both property taxes and property insurance.
- A triple net lease (sometimes known as a NNN lease) is one in which the renter is responsible for three primary expenses in addition to their monthly rent. They pay a part of property taxes, insurance, and maintenance charges in addition to a fixed rent payment.
NNN lease on an absolute basis
This sort of lease relieves the landlord of nearly all financial obligations. Tenants must pay a fixed rent plus a share of property taxes, insurance, and maintenance fees, like in a triple net lease. However, landlords often pay a portion of overall building maintenance costs under a triple net lease. Tenants are liable for all maintenance, including major expenses such as roof and structural repairs, under an unconditional NNN lease.
Gross lease modification
Modified gross leases are flexible leases that don’t suit any other commercial lease’s specific expense split. They allow both the landlord and the renter to designate who is responsible for what. A modified gross lease is tailored to the needs of both landlords and tenants, but you must read it carefully to understand the expenses each side is responsible for.
Lease by percentage
A percentage lease has renters paying both base rent and a proportion of their gross income (typically only when payment is over a certain threshold). A percentage lease may not have a set base rate but instead requires the landlord to take a higher percentage of sales; these forms of percentage leases are frequently used for short-term retail rentals.
Retailers with a seasonal income stream benefit from percentage leases since they keep their rent lower when business is weak. Tenants just need to be aware of the percentage of their income owed to their landlord—a high rate could stymie business growth.
Examining the various lease alternatives for that commercial space to rent in Chicago
The type of commercial lease you’re signing is critical to your company’s success. To summarize, the following are the major advantages and disadvantages of the leases you’ll encounter:
- Full-service leases are desirable because they provide predictable expenses without the risk of unexpected fees. This option is incredibly simple for tenants because they only have to pay a set monthly fee.
- Net leases divide costs between the landlord and the tenant, requiring renters to pay a lesser rent plus a percentage of the building’s costs. These can be attractive agreements for both tenants and landlords, but tenants must be certain that they can absorb rising (and often unforeseen) costs. Retailers can benefit from percentage leases since they pay a cheaper base rent plus a percentage of gross sales. Having a reduced rent during weak sales months can be extremely beneficial to a company’s survival. Because modified gross leases are extremely customizable, you’ll need to read the fine print carefully to ensure you understand exactly what you’re signing.
Adaptable workspace alternatives
In many circumstances, renting office space isn’t the best option for your company. Startups and small businesses may not be ready to commit to a long-term lease and may lack the expertise — or the desire — to manage their property.
Additionally, as they assess their changing needs, larger businesses expanding to new locations may choose more flexible options. Flexible workspace solutions can help with this. Rather than leasing a full area, a company can rent only the space they require, usually for a fixed monthly fee and with no long-term commitment.
Whatever form of the lease you sign, it’s critical to keep track of your spending and budget accordingly, so you know exactly what you’re accountable for. Before you sign your lease agreement, make sure you read it well and ask many questions.
Things to know before signing a lease:
Not all structures are created equal.
- Buildings are classified as Class A, Class B, or Class C. High-end office spaces in key locations make up Class A buildings. Class B buildings are typically smaller and have fewer amenities than Class A buildings. Class C structures are older, in need of maintenance, and are not in a desirable location. The building’s classification will determine the amount you pay for your lease.
The term “usable square footage” means exactly what it says.
- It’s the amount of space available to you and your team. In general, hallways, stairwells, bathrooms, storage rooms, and other areas are not suitable for working. However, your USF includes restrooms and hallways if you rent a complete floor. By eliminating any shared square footage from the whole floor design, you may calculate USF. Your USF is the result, and it gives you an idea of how much actual working space you have.
Cleaning services, repairs, security, landscaping, snow removal, and insurance are all included in maintenance.
- A CAM charge is frequently included in the contracts of anyone leasing office space in a landlord’s building. Keep a close eye on CAM fees, so you know exactly what your contract entails. Are administrative and management salaries, for example, included in these fees? Landlords can get more bang for their cash by charging CAM fees. Make sure you negotiate a fee cap and that all costs are clearly outlined, so you don’t wind up spending too much.
Your letter of intent comes into play once you’ve discovered the appropriate office space and are ready to get started.
- A letter of intent (LOI) is a written document where the tenant expresses their plan to lease commercial office space. You will describe the lease terms and indicate your intent to lease in the letter of intent. Signing a nonbinding letter of intent ensures that you are not formally committed to leasing the property. Always have a lawyer evaluate the LOI if the language isn’t clear or you have doubts about what you’re signing.
The landlord is protected by an escalation clause from rises in property taxes, running expenditures, the consumer price index (CPI), and other costs.
- This clause will inform you how much the rent will grow each year based on these facts. The differences between these terms in different leases can be significant. While landlords prefer minor, annual escalations of a few percentage points, stipulations in long-term leases can require bigger escalations, such as a 10% rise in rent every five years.
Let’s say you find a terrific offer on a whole floor to rent, but you don’t need the whole level just now. You may choose to sublet a portion of your space to another tenant in this case. To do so legally, you’ll need a clause in your lease that expressly indicates that the landlord has given you authority to sublease another renter. Subleasing is popular, but landlords will consider your credit history, finances, and adherence to the original lease agreement before consenting to it. Subletting clauses may involve limitations from your landlord, so make sure you understand the terms before subletting to another renter.
If you understand these important commercial real estate words, you can be more confident in your hunt for the Chicago office space for lease. Now that you’ve learned more, Tag Commercial can assist you in finding the ideal solution.
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