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Expand Y our Proper ty Por tfolio

center might have signed very different leases. That’s because the terms of
commercial leases depend on the market conditions when the lease is signed,
and the relative negotiating powers of the tenant and the property owner.
Tenants who signed office rentals in Silicon Valley in 2003 negotiated much

sweeter deals than those tenants who signed at the peak of the tech boom of
1999–2000.

How Leases Differ

Lease terms determine your net income. Great leases keep your net income
high, and leases with adverse terms drive your income down. Here are several
examples:

• Who pays what? In commercial leases, property owners often shift
some, or all, off the property’s operating expenses to the tenant. In some
leases—especially long-term, single tenant properties—the tenant pays
for operating expenses, building repairs, and major replace ments (e.g.,
roof, parking lot, an heating, ventiliation, and air conditioning system
or HVAC).
• On what space does the tenant pay rents? Commercial tenants fre-
quently pay rent per square foot, but the rentable square footage may
exceed the tenant’s private usable space. Some leases require tenants to
pay rent for hallways, common areas, HVAC rooms, storage areas,
public restrooms, and others. The lease may even specify the precise
way the space is to be measured, which can add or subtract 5 percent,
or more, to the quantity of rentable space.
• Are the rents infl ation protected? If the property is leased to a tenant
for 5, 10, 15 years, or longer, will your rent collections increase with

inflation? When and by how much?
• Are the property owners entitled to percentage rents? Especially in
retail, leases may require tenants to pay a base amount of rent plus a
percentage of the tenant’s business revenues which should be precisely
defined; for example, must the tenant pay a percentage of their off-

premises sales?

Read Each Lease Carefully

I don’t want to make leases sound too complex. Some owners of small
commercial properties write relatively simple, three- or four-page leases that
involve month-to-month tenancies. However, unless you actually read

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