If you are interested in being a commercial tenant, or a landlord for a commercial property, it is important to understand how commercial rents work.
Unlike residential properties, there are wide variations in the marketplace on how commercial leases are structured. Landlords are not restricted by legislation such as the Residential Tenancies Act for commercial properties. The general practice for commercial leases typically falls under three types – gross leases, net leases, and percentage leases.
Under a gross lease, the tenant pays a fixed amount for the rent and the landlord pays all the expenses associated with operating the property. Normally, the responsibility for utility costs and extraordinary repairs are subject to negotiations between the parties.
Under a net lease, the tenant pays the rent, but also assumes responsibility for certain expenses connected with the leased premises. There are three subtypes normally associated with a net lease: single-net lease, net-net lease and triple-net lease. The subtype varies depending on whether the tenant pays for taxes, insurance and maintenance. Net leases structured in this way are also sometimes referred to as base rent and additional rent leases.
Under a percentage lease, the rent is normally based on a percentage of gross sales or net income earned, or a minimum fixed rent, whichever is greater. Percentage leases are mostly found in shopping malls and retail centres.
For investors, commercial properties do carry increased risks; however there is also the potential for significant returns depending on the tenant leasing the property and the location. Many commercial leases are long term and can provide a continued income stream for an extended period of time.