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Understanding Commercial
Leasing in Florida
A lot of people are familiar with the provisions of a residential lease. A lot fewer people have a firm understanding of how commercial leases work and what the differences between the two types of leases are. In this article, I explain some provisions of commercial leases that do not exist in the residential lease context.
I. Operating Expenses
When engaging in commercial leasing in Florida, it's crucial to understand the different types of lease agreements and how they handle operating expenses. Here are the main types of leases you might encounter:
(a) Triple Net (NNN) Lease
In a Triple Net Lease, the tenant is responsible for all operating expenses. This includes the landlord’s operating expenses, property taxes, insurance, and Common Area Maintenance (CAM) fees. Essentially, the tenant takes on the financial burden of maintaining the property, providing the landlord with a net income that is “net” of all expenses.
In practice, the Tenant usually pay a certain amount towards operating expenses every month. Once a year, the Landlord will reconcile what was paid versus operating expenses actually incurred and either give a refund or bill the Tenant for any shortfall.
The charges could be significant.
(b) Full Service/Gross Lease
A Full Service or Gross Lease requires the tenant to pay a fixed rent that covers a variety of operating expenses. These expenses can include property taxes, insurance, interior and exterior maintenance and repairs, utilities, and janitorial services. This type of lease simplifies budgeting for tenants as they know their total costs upfront. However, it’s a financial risk for the Landlord. If operating expenses skyrocket, then the Landlord bears that financial costs alone.
(c) Modified Gross Lease
A Modified Gross Lease strikes a middle ground between a Triple Net Lease and a Full Service Lease. In this arrangement, the tenant pays for expenses directly related to their specific unit, such as utilities and janitorial services, while the landlord covers other operating expenses. This type of lease offers flexibility and can be tailored to suit the specific needs of both parties.
(d) Expense Stop
An Expense Stop is a provision where the landlord agrees to cover operating expenses up to a certain level, often based on the first year’s expenses (the "base year"). Any increase in operating expenses beyond this level is the tenant’s responsibility. This approach limits the landlord’s exposure to rising costs while providing tenants with predictable expenses for budgeting purposes.
II. Sales Tax
In Florida, commercial leases are subject to sales tax. The parties should be aware of this additional cost when calculating their total lease expenses. The sales tax has been steadily declining. In Hillsborough County the latest sales tax rate is 4% (effective June 1, 2024).
III. Improvements and Repairs
(a) Tenant Improvement Allowance (TIA)
When it comes to improving and maintaining leased properties, tenants and landlords have various options. A Tenant Improvement Allowance (TIA) is a sum of money provided by the landlord to the tenant for the purpose of making improvements to the leased space. This can help tenants customize the space to better suit their needs without bearing the full financial burden.
Sometimes a Tenant Improvement Allowance is paid to the Tenant upfront, so improvements can be made. At other times, rent discounts or credits are applied. So, the Tenant would not pay rent for months or even years in compensation for improvements done to the property.
(b) Maintenance Responsibilities
There is no set minimum condition that the landlord must maintain; all aspects of maintenance and repairs are negotiable. Typically, landlords are responsible for the structure and exterior of the building, while tenants handle the interior maintenance. However, these responsibilities can vary widely based on the lease agreement.
The principles of caveat emptor (Buyer Beware), apply to commercial rentals. The tenant generally accepts the property in its “as is,” condition. The lease will outline what, if any, improvements or maintenance the Landlord is responsible for.
(c) Preventing Liens
Tenant improvements may give rise to construction liens which can attach to the property. There are options for the Landlord to prevent this.
Under Florida Statute 713.10, landlords can prevent construction liens on tenant improvements by including no-lien language in the lease. Additionally, they must record a copy of the lease or a short form memorandum of the lease, which includes the no-lien language. This legal measure protects landlords from being held liable for debts incurred by tenants for property improvements.
IV. Guarantees
In many commercial leases, landlords require personal guarantees from the owners of the tenant business. These guarantees provide an additional layer of security, ensuring that the landlord can recover costs from the individual owners if the tenant business fails to meet its lease obligations.
The larger and more established the business, the less likely it is that a personal guarantee will be required.
Conclusion:
Understanding the complexities of commercial leasing in Florida is essential for both landlords and tenants. By familiarizing themselves with the different lease types, expense responsibilities, and legal provisions, parties can negotiate agreements that best suit their needs and avoid potential pitfalls.