Types of leases every business owner should know about before locating a company Part 1

To obtain a leasing arrangement suitable to your business needs, you should be aware of the options available.  The following types of leases are the most common ones.  The name used to describe each lease may vary in your region, but the concept behind the description is the same.  In this article we will cover 5 common leases that need little explanation, leaving part 2 of this article to explain further types of leases.

Ground Lease

A buyer may purchase a building or business property without actually purchasing the land under it. The land may be leased separately on long term lease basis (for example 99 years). By purchasing a building and leasing the underlying land, the financial outlay of capital for the land is eliminated and yet the benefit of its use can be obtained. The cost of leasing the land can also be written off as a tax deductible expense.

Net Lease

In a net lease situation, the tenant pays a flat rate, which is all inclusive of heat, light, water, taxes, common area use, ground maintenance , building repairs and other such costs.

Net Lease Plus Taxes

A net lease plus taxes agreement is similar to the net lease except that there is an agreed upon extra expense for taxes. Any taxes over and above the base tax rate are passed on to the tenant totally or partially depending on what is negotiated. The extra cost for taxes would normally be passed on annually, after the tax assessment has been obtained and paid by the Landlord.

Triple Net Lease

In a triple net lease situation, the base rent is a certain price (for example $10 per square foot of area rented) but the tenant is responsible for paying a proportionate share of all the extra charges incurred by the Landlord. These are normally outlined in the lease agreement (these extra costs or operating expenses could add up to the equivalent of another $6 or $7 per square foot for example. The total monthly rental outlay would therefore be approximately $16 per square foot). The operating costs may fluctuate each year based on taxes, maintenance, insurance, administrative and management costs. When one refers to a cost per square foot for lease space, it is quoted on an annual basis. To calculate the monthly rent you multiply the square footage of the premises by the cost per square foot and divide by 12.

Index Lease

An index lease is one in which the rent varies based on a formula of costs incurred by the Landlord. For instance, the lease may vary every year based on the cost of living index to account for inflation.

Stay tuned!  Next week we’ll cover three more types of leases that you need to know about before diving in to an agreement with a landlord for your business.