Commercial Vs. Housing Rentals

Renting property is often the first step on the path to financial independence.  Whether it’s your first apartment as an adult, or your first office as an entrepreneur, signing a lease can be a pivotal turning point.  However many similarities the two experiences seem to share, though, there’s nevertheless a fundamental difference between a personal property rental and a commercial transaction.

Housing rentals are much more standardized than their commercial counterparts.  Most leases resemble one another, to some extent, with many of the terms predetermined by the landlord and/or property management company.  This can include the length of the lease, the amount of monthly rent, information regarding the security deposit, and so on and so forth.  On rare occasions, the renter will have some input regarding these specifications, but usually they’re dictated by the owner.  Both parties generally enter the agreement under good faith; however, circumstances can change.  If you’re renting a house or apartment and suddenly find yourself needing to move, your options may be limited, but they typically still exist.  The first thing you should do, if you find yourself in this situation, is actually read your lease—this will allow you to find information you may have missed in the excitement of moving, such as a lease-break clause.  Unless you have a month-to-month lease agreement, this type of clause is your next best bet.  Unfortunately, last-minute lease breaking is generally a privilege reserved only for the military and diplomats, and the rest of us are beholden to pay the agreed-upon amount for the full length of the contract.  Thus, renters are often forced to get more creative.

Subletting is a common solution, where and if it’s allowed.  More common in metropolitan areas, it’s also a practice that has to be authorized by the landlord before an agreement can officially be drawn up.  When it works, it’s designed to afford renters greater freedom by letting them rent the place under contract to someone else.  This is ideal for those last-minute life changes, seasonal environments, and travelers abroad.  Yet, most leases don’t permit subletting because most of the liability continues to rest with the original renter, including the responsibility to pay the rent in full, to pay the utilities, and to settle the bill for all damages incurred.  Thus, everyone besides the subletter can suffer from this deal, should it turn out badly.  A more favorable option is a lease-takeover, which is exactly what it sounds like. In this scenario, a new renter comes in and replaces you on the current lease, so you’re only responsible for continuing payments until they move in.  To know more about your options, and how to talk to your landlord, check out this article from The Washington Post  When it comes to commercial real estate transactions, however, the options are much more varied.

Starting with the lease, you have to pick the one that makes the most sense for your business—and what works for a startup company isn’t the same agreement that will benefit it 5 or 10 years into the business.  Most of the time, companies begin with a short-term lease that allows them flexibility and minimizes their overhead.  While this doesn’t always equate to the most luxurious of circumstances, it does tend to be simpler.  One example of a common commercial lease is the single net lease, or net lease, which commits the renter to paying for utilities and covering the property tax, while the landlord maintains all other expenses.  You can also choose a net-net, or double net lease, that adds the expense of insurance premiums onto the responsibilities of the renter from the single net option.  Then there’s the triple net lease in which the renter pays for most expenses, with the landlord stepping in only for structural repairs.  The most common form of commercial agreement, though, is the modified gross lease (or modified net lease).  This splits both operating and repair costs between both parties to form a static “base rent,” which doesn’t fluctuate for the renter in years of high repairs (but doesn’t decrease during the easy years, either).  Ultimately, the lease structure decides who is responsible for damages, which can grow much larger in a commercial setting than they would in a private dwelling.  If you want to find out just how important the lease can be, read a few examples of agreements-gone-bad from Forbes:

In a poor rental situation from personal perspective, you can easily be out a security deposit, as well as a few months’ rent.  Should the tables turn in a commercial deal, the stakes are much higher.  The leases typically last longer, and the damages can range in the millions of dollars if you’re not careful.  Therefore, it’s always a good idea to seek advice from a legal expert before signing a real estate contract.  The problem is much easier to fix before it ever arises!


This entry was posted on Wednesday, September 27th, 2017 at 11:38 am. Both comments and pings are currently closed.

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