How is the monthly rental amount calculated?
When you are looking at a commercial rental listing or a lease, it is important to understand how the monthly rental amount is calculated. Unlike residential leases that almost always show a monthly rent, commercial landlords might list the rent in different ways:
- Monthly rent. Around $500 per month is most common for smaller spaces such as offices that are used by one person or a small team.
- Annual rent. Some leases or listings show the total dollar amount of rent per year. In most cases, you pay monthly payments of 1/12 the annual rent. A total of $6,000 in annual rent works out to $500 per month in payments.
- Per square foot (annual). Many leases and listings use annual rent per square foot. For example, $12 per square foot for a 1,000-square-foot space works out to $12,000 in rent per year. The annual rent is usually still divided into equal monthly payments, so you end up paying $1,000 each month.
- Per square foot (monthly). Rent can also be listed as a monthly cost per square foot. If the annual rent is $12 per square foot, the monthly rent is $1 per square foot.
- Percentage. A percentage lease charges rent based on sales income. If your rent is 5% of annual sales and your annual sales are $1,000,000 — you pay $50,000 in rent. Some percentage leases also include a fixed rental amount like one of the options above. Percentage terms are common in a Retail Space Lease.
- Percentage over base. This method charges rent based on a percentage of sales over a certain base amount. For example, 5% of sales over $500,000. This means the base sales amount is $500,000. So if you have $600,000 in sales, you pay 5% of the $100,000 over the base for rent, which is $5,000. These leases will often require a fixed amount of rent in addition to the percentage over base.
What does the landlord cover and what expenses do I pay?
There is more to a Commercial Lease than calculating just the rent. There are other fees to consider — like utilities, taxes, maintenance, trash removal, landscaping, window washing, parking lot repairs, and other costs.
There are three main types of commercial leases, some of which include these types of added expenses:
- A gross lease or full-service lease requires the landlord to be responsible for taxes, maintenance, and operating expenses.
- A modified gross lease starts as a gross lease but lets the landlord pass operating expenses to the tenant as they increase.
- A net lease requires the tenant to pay for some or all of the expenses, such as taxes, maintenance, and operations. What the tenant pays for is defined by the lease. One example is a Triple Net Lease, which can require you to pay taxes, insurance, and maintenance fees.
What is an "escalation clause" and how might it affect my monthly rent?
An escalation clause defines how rent can increase each year in a multi-year lease. There are three common types of escalation clauses:
- Fixed dollar amount per year.
- Fixed percentage per year, normally based on each prior year's rent, not the starting year's rent.
- Inflation-based, meaning the rent goes up based on the Consumer Price Index or some other measure of inflation.
Keep in mind that if your lease calls for you to pay expenses, those expenses may rise even apart from any escalation clause. If you are worried about increasing expenses, you and your landlord may be able to agree on limits for expense increases.
Does the lease require a personal guarantee?
Some commercial landlords require a personal guarantee from the owner, especially when the business does not have enough income, credit, or rental history. This means the business owner, and not the corporation or LLC, may be personally responsible for unpaid rent or for other ways the lease may be broken.
What are my renewal options?
There are often two risks when it comes to choosing the length of the lease. A lease that is too long could cause you to lose more if your business does not go as planned. A lease that is too short could put you out of business if you cannot agree to new terms with your landlord when it ends.
Renewal options help to reduce these risks. A renewal option lets a tenant automatically extend a lease. Without this option, the lease expires based on the original terms. The option terms should say if the rent will stay the same, go up by a certain amount, or change based on market factors listed ahead of time. In the same way, the option can also state if other lease terms might change, and if there are limits on the changes.
Can I rent part of the property to someone else?
If you have more space than you need, or want to move locations before your lease ends, you may want to consider a Commercial Sublease. Your agreement with your landlord may require a subtenant to meet certain requirements or be approved by the landlord.
Can I buy the property I am leasing?
If you are thinking about staying in a property permanently, a Commercial Real Estate Lease with Option to Purchase may be a good choice for you. Before your current lease is up for renewal, you may want to discuss this option with your landlord.
If you need help reviewing a lease or working out changes to a Commercial Lease, reach out to a Rocket Lawyer On Call® attorney for affordable legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.