“Things To Know When Managing Commercial Rentals” written by Mike Marko
Are you looking to get into managing commercial rentals but don’t know the first thing about them?
Managing commercial property requires a lot of patience and coordination. One wrong decision could lead to the property’s bankruptcy. To avoid this, you should know everything you can about managing a commercial property… especially the basics.
People even trip up using the type of lease. This can leave you vulnerable.
That’s why in this article we’ll discuss the different types of lease, along with tips on how you can better manage your commercial rentals.
Basic Guide In Managing Commercial Rentals
If the focus of your property management business is toward commercial buildings and commercial rentals then you will need to understand and be able to manage commercial leases and commercial rentals. A commercial rental is when a business moves into the building you are managing and sets up business.
The commercial lease is the legal document you must agree on with the company doing business in your building that covers all aspects of the building services as well as all duties and responsibilities of both parties to the lease.
As a property manager, understanding the basics of managing a residential property can be an effective way to lessen your troubles. However, going into and understanding commercial leases is a specialty service in itself. In this article, we will give you everything you need to know about commercial rentals and lease…
To begin the education process, let’s first talk about the meaning behind the term commercial rentals.
What Are Commercial Rentals
The term commercial rentals is also known as commercial property, commercial real estate, investment or income property that is set up to handle different types of commercial or business rentals. Commercial rentals are either an entire building for one company or a building or land intended to generate a profit from capital gain or rental income from the business of commercial clients.
The common examples of commercial rentals are office buildings, industrial property, medical centers, hotels, malls, retail stores, farm land, multifamily housing buildings, warehouses, and garages.
Types Of Commercial Lease
There are three different types of commercial lease. Each of them is characterized by two rent calculation methods which are “Net” and “Gross”.
A “Gross” lease means the tenant is paying an expensive rent because their expenses are being paid by the landlord. On the other hand, a “Net” lease is when the tenant is paying a cheaper rent and the tenant pays almost all other expenses thus other expenses are not shouldered by the landlord.
When setting up a gross lease you need to understand all of the costs and expenses that the business who will be occupying the commercial rental has. This is because a gross lease, also known as Full-service Lease, has rent that is all-inclusive. It means that the landlord or property manager pays for all or most expenses associated with the property out of the rents received from tenants. The best commercial property managers understand the business clients they are renting to and are able to set the correct level of rent that covers the business expenses as well as making a profit on the commercial rental.
When entering into a gross lease, the expenses associated with the property such as taxes, insurance, and maintenance are paid by the property manager. Other utilities and janitorial services are also included in the easy rent payment of the tenant. Knowing these expenses is key to setting the correct level of rent for the commercial lease period.
Even in a gross or full-service lease, there are still items that need to be identified as not covered under rent and thus need to be covered by the business leasing the property. A common inclusion is setting a level of energy usage covered by rents and if exceeded levels then that additional cost or usage of utilities that are above the limit of the agreement is charged to the tenant. The tenants still have to pay their own property insurance and taxes.
Many tenants consider gross lease as the best type of lease since all the major responsibilities in the property are taken care of the landlord or the property manager. When using a gross or full-service lease the tenants or commercial tenant can handle their budget easily without worrying about additional charges.
Most common types of businesses that use gross leases are office administrative types of business and other types of businesses were costs are easily identified and remained fixed as part of the business practice…
In a net lease, most of the business and building expenses are paid by the business tenant. When entering into a net lease agreement it is common for the landlord to charge the tenant a lower base rent for the commercial space.
Since net lease payments to owners of the property only cover the occupancy and use of that rental space, here are some other expenses
in addition to the base rent that the tenant will also have to pay:
o Operation expenses
o Real estate taxes
o Property insurance
o Common area maintenance items (CAMS) which include:
▪ Janitorial services
▪ Property management fees
▪ Trash collection
▪ Parking lots
▪ Fire sprinklers
Since the commercial business that is leasing the space does not own the building or the rental space using a net lease is a bit more complicated than a gross lease.
To help to meet customers and building owners needs they have developed three types of Net Lease:
Single Net Lease (N Lease)
In the single net lease, the tenant pays base rent along with a pro-rata share of the building’s property tax. It means that a portion of the total bill is based on the total building space used by the tenant.
The landlord covers all other building expenses while the tenant pays for the utilities and janitorial services for their individual commercial space being rented.
Double Net Lease (NN Lease)
When in a double net lease, the tenant will be responsible for base rent plus a pro-rata share of property taxes and property insurance.
Landlord will take care of the expenses for structural repairs and common area maintenance while the tenant will have to pay for the utilities and janitorial services for their individual commercial space being rented.
Triple Net Lease (NNN Lease)
The triple net lease is the most popular type of net lease for commercial freestanding buildings and retail spaces. This type of lease is also known as the net net net lease or NNN lease.
In this type of net lease, the tenant pays all or part of the three nets – property taxes, insurance, and CAMS (Common Area Maintenance) – on top of a base monthly rent. Common area utilities and operating expenses are also included.
However, the tenants still pay the costs of their own occupancy, including janitorial services, utilities and their own insurance and taxes.
The triple net lease is beneficial for landlords or property managers. If a tenant rents the 1,000 square feet of a 10,000-foot building, the 10% of the building’s taxes, insurance, and CAMS will be added to their total amount of rent.
Absolute Triple Net Lease
An absolute triple net lease is a less common option for tenants because it is more rigid and binding than the NNN lease.
In this type of lease, the tenants face a huge real estate risk. The tenants with this type of lease are required to be fully committed to the rented property. To enter into the absolute triple net lease the business must be able to qualify for financing and possible purchase of building they will be renting.
The absolute triple net lease is sometimes called the “hell-or-high-water-lease” because the tenants have ultimate responsibility for the building no matter what happens. For example, if the rented property was damaged, it’s their responsibility to continue paying their rent and they also have to give a portion for the cost of repairing the property.
Modified Gross Lease
The modified gross lease is sometimes called the modified net lease. This type of lease is similar to a gross lease where the rent is requested in one lump sum and it could include any or all of the nets such as:
- Property taxes
However, the utilities and janitorial services are excluded from the rent. The tenant will have to pay for those services separately. Also, in a modified gross lease, the tenants and landlords or property manager can negotiate which “nets” are included in the base rental rate. This makes this type of agreement the most preferred lease by most tenants. Its flexibility makes the agreement less complicated.
3 Areas To Focus On When Managing Commercial Rentals
Aside from knowing the different types of lease for commercial rentals, property managers should also know the 3 areas to focus on when managing commercial rentals when developing a successful commercial property management business.
1. Attention To The Physical Space
When managing a commercial property, the location of your building can affect your income. It will have an effect on the quality of tenants. As the property manager, you should pay attention to a building’s physical requirements. Keep in mind that the landscaping, janitorial services, systems engineering, renovations could affect the reputation of your business.
Aside from that, the property manager should also be responsive to the need for repairs or replacement within the premises of the commercial rentals. To attract and keep quality tenants the property should be in good repair.
2. Stronger Tenant Relationships
When managing commercial rentals, property managers should work on building their relationships with tenants. The tenants make a commercial rental business successful. Without good tenants, your commercial rental business would not be successful.
As the property manager, it’s important to build the business cooperation with your tenants. You need to work proactively manage lease expirations and renewals. Having a face-to-face casual interaction, and improved word-of-mouth discussions among your tenants can help reduce turnover (which costs money when you have vacancies and renovations).
3. Building Brand And Positioning
Finally, remember that the building’s reputation has a significant impact on the brand of each tenant’s business. That “first impression lasts” and that is why it is advisable to highlight your property’s unique features and services. Enhancing the “brand” in the local marketplace will help the tenant rental business to grow long term.
Final Thoughts About Commercial Rentals
Commercial rentals can generate a lot of revenue if it’s managed correctly. Identifying the right types of lease for commercial rentals can help you in the long run. We also talked about some key points you need to know when it comes to effective management of commercial rentals. We talked about important aspects of commercial rentals, including about property location, tenant management, and building reputation.
Comment below if you have any questions relating to this commercial rentals article.
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