From an idea to execution, starting a business is no small task. It requires forethought, industry insights, and a stomach for setbacks. And for many businesses, whether they’re just starting out or scaling up, space is an essential. But navigating the world of commercial real estate, as an outsider, is an obstacle all its own. We have cataloged the key points on commercial leases in Texas just for entrepreneurs.
What is a Commercial Lease?
At some point in your life, you’ve likely rented an apartment or house; most people are familiar with residential leases and their terms. But commercial leases have different stipulations and can be more complex than a standard residential lease.
First, a commercial lease requires the space to be solely used for conducting business unless otherwise stated. This condition is primarily the outcome of zoning codes and safety measures. And, while it is an enticing convenience to live and work from the same space, most commercial buildings are not zoned for residential use, and living in these spaces can carry consequences, such as eviction; however, mixed-use properties are becoming more common in the metropolitan areas of Texas.
Additionally, most commercial leases last for 3 to 5 years, rather than month-to-month, 6-month, or 1-year lease terms common to residential properties. This means a commercial lease is a heftier responsibility, but they also offer more room for negotiating the terms of the lease than residential leases.
Lastly, the tenant – not the landlord – is responsible for property taxes under some commercial leases. For renters, this can be a huge hurdle. Pay special mind to the location, average property tax in that area, and the type of lease offered before selecting your rental property.
Types of Texas Commercial Leases
There are three main types of commercial lease structures in Texas:
- Gross Lease
- Percentage Lease
- Net Lease
Before seeking commercial property, protect your interests by familiarizing yourself with the different commercial lease agreements and their conditions. However, remember that these are just templates – you should negotiate the specifics.
A gross lease consists of an annual flat fee. The fee is the sum of rent and yearly operating expenses: utilities, cleaning services, taxes, etc. A gross lease is ideal for business owners with strict budgets, as they can expect their costs precisely.
Gross Lease = Base Rent + Operating Expenses
Alternatively, under a modified gross lease, the tenant pays the annual fee but may be responsible for other costs related to building operations, such as amenities or specific utilities, that are not included.
The percentage lease structure is similar to the gross lease – base rent plus operating expenses – but includes a percentage of the business’ monthly gross sales from transactions in the space. This sort of lease agreement is typically utilized for retail spaces.
Percentage Lease = Base Rent + Operating Expenses + % of Gross Sales
Net leases are a common lease structure for commercial properties in Austin; in fact, the triple net lease is the most common lease utilized in Austin commercial real estate. Under a net lease, tenants are responsible for the base rent and a proportional share, pro-rata share, of the specific operating costs for the building. Which costs the tenant is responsible for depends on the type of net lease employed.
- Single Net: Tenant pays base rent plus pro-rata portion of property taxes
- Double Net (NN): Tenant pays base rent and pro-rata portion of property taxes and insurance.
- Triple Net (NNN): Tenant pays base rent and pro-rata portion of property taxes, insurance, electricity, and cleaning/maintenance services.
Additional Costs of Texas Commercial Lease Agreements
Within the commercial lease, additional costs should and will be outlined; these are costs the tenant is responsible for beyond their base rent. This may include the aforementioned pro-rata share of operating expenses, but also could include other fees such as a security deposit.
What’s more, if you’re a business owner in a competitive industry, you may negotiate for an exclusive-use contract; these contracts ensure your business has “exclusive” permissions to rent the space within a specific market. For example, suppose you open a vegan restaurant in a commercial building. In that case, you may request an exclusive-use contract, so another vegan restaurant is prohibited from opening a space within the same market and herding the same pack of consumers.
If you’re a business owner looking to expand out of your home office or open a brick-and-mortar establishment, you’ll need a commercial lease. You should have a partner to help you maneuver the complicated realm of commercial real estate in Texas and negotiate your lease. At Richards Rodriguez & Skeith, our experienced team of real estate attorneys can guide you. Contact us today and feel secure in your commercial lease.