3 Types North Carolina Commercial Real Estate Leases: Comparing Pros and Cons
It is useful to weigh the pros and cons of different types of lease arrangements which are Net Real Estate Lease, Full Service Commercial Real Estate Leas, and Gross Lease.
If you are a North Carolina business owner looking to lease commercial real estate, there are numerous factors to consider as you do your homework to find the right fit. As usual when addressing your company’s needs, one of the first issues will be cost. In general, the more income you make, the more you can afford in terms of rent. One helpful assessment that small business advisers often suggest is comparing your rent to current and expected revenue. While the details depend on your industry, location, and other business objectives, you might aim for a rent to revenue ratio of around 2 to 20 percent.
However, as you mull over rental costs, another important factor is the type of commercial real estate lease makes the most sense for your company. Whether it is your first time entering into a rental agreement or you need a refresher course, it is useful to weigh the pros and cons of different types of lease arrangements. You can trust a North Carolina commercial real estate attorney to advise you on the specifics, but a comparison of the basics may be useful.
- Net Real Estate Lease: Through this arrangement, your company pays rent as separate from expenses. You are responsible for paying the costs for utilities, insurance, property taxes, and maintenance within your own space; plus, you are obligated for expenses related to management of the common areas, including a parking lot or garage, sheds, and related fixtures on the property. Experts in the commercial property industry report that this type of lease, often termed “triple net” leases, are most common for a standalone building with a sole tenant under a long-term agreement.
- Pros: You can control costs better through responsible use of utilities; plus, you are paying the actual cost for property taxes and maintenance instead of an amount as forecast by the landlord.
- Cons: If major repairs become necessary, such as the need to replace a furnace, AC, or roof, your company must have the reserves to cover expenses.
- Full Service Commercial Real Estate Lease: With this type of lease, almost all costs connected with occupation of the space are covered. Your rental amount will include property taxes, maintenance, insurance fees, and some utilities, though your company is generally responsible for electricity. The full service commercial lease is most common in large buildings with numerous tenants.
- Pros: Your costs are predictable, since you will not get hit with a property tax increase or a large repair bill.
- Cons: The full service lease is typically the most expensive. The landlord sets the rental amount based upon a variety of contingencies and allows some buffer, so your rent will be higher.
- Gross Lease: The gross lease falls somewhere between the net and full service versions, so you will pay designated fees as part of your rental amount. You will probably be responsible for property taxes, common area maintenance, and your own utilities. According to regional economists, the average gross asking rent is around $33 per square foot in urban areas and slightly less in outskirts like Gastonia, NC.
- Pros: You can better forecast costs as compared to a net lease, and the lease will be specific on what triggers a rental increase.
- Cons: You will have less control over costs. The landlord has decision-making authority, and you pay for those decisions.
Our North Carolina Commercial Real Estate Lawyers Can Advise You on Your Options
While this comparison of the pros and cons of different commercial real estate leases may be useful, our team at Mullen Holland & Cooper P.A. can counsel you on the details as they pertain to your unique circumstances. To set up a consultation at our offices in Gastonia, NC, please call 704.864.6751 or visit us online.
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