I attended a session at the 2022 America’s Association of Small Business Development Centers conference about business leases, which inspired me to look further into the topic. If you are considering renting a location for your business, here are some things you need to know before you get started.
Business leases vary dramatically from leases for private apartments or homes. For private dwelling leases, the landlord is often on the hook for almost every property-related expense. Most commercial leases may have lower rent for the space, but everything building-related is likely the tenant’s responsibility, from insurance to maintenance. Looking at the different lease types will help you see that rent is only a small factor when looking at other costs and liabilities you might not know of. Let’s look at the common types of commercial leases:
Single Net Lease (N): This lease is most similar to what you may have seen while renting apartments. The tenant pays rent, utilities, and their share of building maintenance and building-related taxes.
Double Net Lease (NN): Double Net Leases have slightly cheaper rent than Single Net leases, but that is because the landlord passes on another level of expenses to the tenant, usually the insurance premiums. The landlord still maintains and takes care of the overall building.
Triple Net Lease (NNN): These leases are cheaper rent-wise, so they seem attractive to business tenants, but the expenses and risk that the tenant business takes on are where they pay the price. These are more common for industrial buildings where the tenant pays for almost everything including landscaping, insurance, utilities, taxes/fees, and maintenance (as well as snow removal). These are becoming very common as buildings become investments and investors, who don’t like risk, offload that risk onto their tenants who then must cover the risk for the owner’s investment, including insuring the building. Businesses should look to see whether or not the owner/landlord will still cover significant issues, such as the roof and structural issues.
Absolute Triple Net Lease: This is like the Triple Net Lease except that the business takes on the full risk of the building and must be able to replace it if it is destroyed, say in an earthquake or fire. At this point, these leases are rare but worth mentioning.
As a tenant, you need to know what lease you are in or might be getting into. If you see a Triple Net Lease with a great price, maybe it is worth having the building inspected for possible issues plus getting an insurance quote to see what the end cost will be rather than only looking at the attractive rent price. Similarly, although it is nice to have a landlord who maintains pretty much everything in a Single Net Lease, you will be paying significantly more for the service than if you took on the extra risks and responsibilities. For every building and business you may encounter, the risks vary and you need to consider those and the lease arrangement before signing any binding contracts. Remember, everything is negotiable.
If you are currently hunting for the perfect location for your business, contact your Wyoming Small Business Development Center network advisor for assistance in deciding what risks versus rewards work for you. Your advisor is always ready to help you evaluate or even brainstorm negotiation tactics for your next lease. Connect with us today!
About the Author: Jim Drever was born in Laramie, WY. Although he considers Wyoming home, Jim spent several years abroad studying and working in places like Japan, Switzerland, Scotland and Germany. He has also worked as Marketing Director for a local software company.