Location is one of the three most important features of any small business in New York or New Jersey. The other two critical features, as the saying goes, are location and location. Any business that must maintain a permanent physical location must decide whether to purchase or lease real estate. Each offers advantages, depending on the nature of the business and the means of the company. Renting is very common for new and small businesses, and for many businesses in dense areas like New York City. Commercial leases differ significantly from residential leases. It is therefore important for business owners to understand the general types of commercial leases and a few of the features of each.
Leasing Versus Owning
Leasing a property to locate one’s business is almost always a prudent move when starting a business. As a tenant, or “lessee,” the business is typically only responsible for rent and, in some cases, pro rata shares of maintenance costs and property taxes. The lessee may vacate the property when the lease expires, or earlier with an early termination penalty. On the other hand, a landlord may choose not to renew a lease when the lessee would prefer to stay.
Owning a piece of property may offer greater flexibility and security, with no landlord or threat of lease termination, but it also offers many drawbacks. The owner of commercial property is responsible for all taxes and shoulders all liabilities related to the property. Certain state and federal laws, such as environmental regulations, may impose costs and liabilities on a property owner for pollution or other dangerous conditions, even if those conditions were created by a previous owner. Finally, selling a property can be far more costly and risky than terminating a lease.
Under a gross lease, the landlord pays most or all of the costs of maintaining and operating the property. The lessee pays rent, and may also pay a share of the landlord’s costs through what is commonly called “load factor.” This type of lease is common for properties that rent office or warehouse space to multiple businesses.
A net lease involves payment of rent by the lessee along with certain expenses affecting the entire property. Net leases are often used with freestanding commercial buildings with only one lessee, although they may also be used in multi-business office or retail properties.
In a single-net lease, the lessee pays the property tax as well as base rent.
In a double-net lease, the lessee additionally pays for commercial property insurance, while the lessor pays to repair structural damage to the building.
In a triple-net lease, the lessee also pays all maintenance and repair costs, as well as all taxes and insurance.
Percentage leases are common in larger retail spaces, such as shopping centers and malls. The lessee pays base rent to the landlord, as well as a percentage of revenue generated by business activities on the leased property, e.g. sales. A percentage lease may only require a lessee to pay a percentage of revenue above a certain amount in a given reporting period, usually a month.
Samuel C. Berger, PC’s business attorneys represent New York and New Jersey businesses and entrepreneurs through fixed-fee legal service packages. We assist businesses in a wide range of legal issues, and we work to help our clients understand their rights and obligations, allowing them grow and run smoothly. To schedule a confidential consultation with a member of our team, please contact us today online or at (212) 380-8117.
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