Decoding Commercial Leases: A Guide for Michigan Business Owners
Commercial leases are a necessary evil that affects most businesses, providing the space required to operate and grow. However, for the typical business owner, understanding the intricacies of these different lease types can be daunting. Choosing the right lease agreement is crucial for your business's financial health and long-term success. This article, the real estate attorneys of Thompson Legal will explore the various types of commercial lease agreements commonly used in the industry and offer insights to help make informed decisions.
Please note that this post is not exhaustive, and every situation is unique. In the event that you have legal questions it is advisable to speak with a licensed attorney. Contact Thompson Legal to speak with a Michigan Real Estate attorney today.
Understanding the Basics of Commercial Leases
Before getting too deep into the specific types of leases, it's essential to understand some fundamental concepts. A commercial lease is a legally binding contract between a landlord and a tenant, outlining the terms and conditions for the rental of commercial property. These terms include the lease term, rent amount, permitted use of the space, and responsibility for expenses like property taxes, insurance, and maintenance. The type of lease you choose will significantly impact your financial obligations and operational flexibility.
Types of Commercial Leases
Commercial leases come in various forms, each with its own structure and implications. Here are some of the most common types currently used in the industry:
Triple Net Lease (NNN): In a triple net lease, the tenant is responsible for paying not only the base rent, but also a share of the property taxes, insurance, and common area maintenance (CAM) costs. This type of lease offers landlords the most predictable income, while tenants have more control over operating expenses.
Pros: Predictable rent for landlords, greater control over expenses for tenants.
Cons: Higher upfront costs for tenants, potential for unexpected expense increases.
Double Net Lease (NN): Similar to a triple net lease, a double net lease requires the tenant to pay base rent plus a share of property taxes and insurance. However, the landlord typically covers CAM costs.
Pros: Lower upfront costs than NNN leases, some control over expenses.
Cons: Less control for tenants over CAM expenses, which can result in potential for increased expenses over time.
Net Lease: In a net lease, the tenant pays base rent plus one specified expense, such as property taxes. The landlord covers all other operating expenses.
Pros: Simpler expense structure for tenants.
Cons: Less control over expenses, potential for increased costs. Generally higher risk for the landlord.
Gross Lease: A gross lease, also known as a full-service lease, is the simplest type. The tenant pays a fixed rent amount, and the landlord covers all operating expenses, including property taxes, insurance, and CAM.
Pros: Predictable rent for the tenant, no responsibility for operating expenses.
Cons: Less control over expenses, potentially higher rent over time.
Percentage Lease: Common in retail settings, a percentage lease involves the tenant paying a base rent plus a percentage of their gross sales. This type of lease aligns the landlord's interests with the tenant's success.
Pros: Potential for lower rent in slow periods, aligned interests.
Cons: Requires transparency in sales reporting, potential for higher rent in successful periods.
Commercial lease options like the Gross Lease are often ideal for smaller businesses or startups. With a fixed monthly rent, tenants can more easily forecast their occupancy costs, making financial planning and management more straightforward. They don't have to worry about fluctuating expenses for taxes, insurance, or maintenance, which can be particularly helpful for smaller budgets with less room for error.
While the gross lease offers convenience and predictability, it's important to understand that the base rent in this type of lease is often higher than in other lease structures, such as a net lease. This is because the landlord factors in the cost of those operating expenses when determining the rent. Essentially, the tenant is still paying for those expenses, but they're doing so through the higher rent rather than through separate payments. Also, while some gross leases may include utilities, others may require the tenant to pay those separately
Therefore, it's crucial for any potential commercial tenant in Michigan to carefully review the specific terms of their lease to fully understand what is and isn't included in the monthly rent. Most commonly seen in the industry today is the Triple Net NNN leases. While seemingly burdensome for the tenant, NNN leases offer predictable monthly expenses and potentially lower base rent, balancing risks and costs between the landlord and commercial tenant.
Factors to Consider When Choosing a Lease
Choosing the right commercial lease for your specific situation requires careful consideration of several factors:
Budget: Evaluate your budget and determine how much you can afford to spend on rent and operating expenses.
Business Needs: Consider the size and type of space you need, as well as any specific requirements, such as parking, zoning, loading docks, or office configurations.
Lease Term: Negotiate a lease term that aligns with your business plans.
Location: Choose a location that is convenient for your customers and employees.
Legal Counsel: Consulting with a qualified real estate attorney is highly recommended before signing any commercial lease. An attorney can help you understand the complexities of the lease, identify potential risks, and protect your interests.
Due Diligence: Thoroughly inspect the property and research comparable lease rates in the area.
In Michigan, real estate brokers who assist in commercial lease transactions may also have lien rights on the property to secure their commission. These liens, often referred to as broker's liens, can be complex and require careful attention from both landlords and tenants. Understanding the circumstances under which a broker's lien can be filed, the requirements for perfecting the lien, and the priority of such liens is crucial for protecting your interests. For a more detailed explanation of broker's liens and their implications in Michigan commercial real estate transactions, please refer to our article, Commercial Real Estate: Brokers, Benefits, and Broker Liens in Michigan — Thompson Legal.
Conclusion
Navigating the complexities of commercial leases can be challenging. Understanding the different types of leases and their implications is essential for making informed decisions that support your business goals. By carefully considering your needs and seeking professional guidance, you can secure a lease agreement that sets your business up for success. For further guidance please contact Thompson Legal today to schedule a consultation with an experienced Real Estate attorney.
This article is for informational purposes only. It is not intended as legal advice. In the event you would like to speak with a Real Estate Attorney, please Contact Thompson Legal at (734) 743-1646 to schedule a consultation.
