What California Real Estate Investors Should Know About Commercial Leases

For rent signAuthor: Staff

Real estate investment can take many forms and offers many ways to obtain a return on one’s investment. Some investors purchase real property in order to make improvements and sell it, while others may purchase property with the goal of leasing it for rental income. Leases on real property can be broadly divided into two categories:  residential and commercial. While residential leases are subject to a wide range of legal restrictions aimed at protecting tenants, commercial leases allow far greater flexibility. Both types of leases involve their share of risks, from the hassle of collecting unpaid rent to the possibility of serious damage to the property. Commercial real estate investors in San Diego should be aware of the opportunities—and liabilities—that commercial leases have to offer.

How Are Commercial Leases Different from Residential Leases?

A lease is a contract between an owner of real property, known as the lessor or landlord, and a lessee or tenant. In a residential lease, the lessee intends to live in the leased property. California law protects residential lessees by requiring a variety of disclosures by lessors and by restricting various procedures like eviction and the collection and use of security deposits.

The usual purpose of a commercial lease, on the other hand, is to operate a business. State law sets far fewer restrictions on commercial leases, allowing both parties to negotiate terms regarding rent payments, property maintenance, payment of taxes, code compliance, and other matters. Commercial leases may cover private office space, retail space that is open to the public, and warehouse and other storage space, just to name a few possibilities.

Types of Commercial Leases

Nearly all commercial leases involve the periodic payment of rent and a requirement that the lessee carry insurance protection for the leased property. Beyond that, the terms of a commercial lease may depend on the length of the lease term, the size of the property being leased, and the nature of the lessee’s business. Common commercial lease arrangements include:

– Percentage lease:  The tenant pays a base rent amount, plus a percentage of monthly revenue. This type of lease is common for retail spaces like shopping malls.
– Net lease:  The tenant pays base rent, plus some or all of the taxes, insurance, and maintenance costs.
– Gross lease:  The lessor pays most costs associated with the property, and in addition to base rent, the tenant makes a payment to the lessor known as the “load factor” to cover those costs.
– Ground lease:  The lessee develops the leased property at its own expense, such as by constructing a building for office or retail use, pays all taxes on the property, and turns over ownership of all improvements to the lessor at the end of the lease term. Ground leases tend to have much longer durations, and they may extend as long as 99 years.

California Commercial Leases and Disability Laws

California law requires commercial lessors to disclose whether a Certified Access Specialist (CASp) has inspected the leased property. A CASp inspection assesses a property’s compliance with state and federal laws regarding accessibility for people with disabilities. The lessor is responsible under state law for ensuring that the leased property complies with the Americans with Disabilities Act (ADA), unless the lease agreement expressly states otherwise.

You can read more about Certified Access Specialists and their relation to commercial leases here.

More Blog Posts:

Foreclosure Sales and California Real Estate Investors, Titles and Deeds, July 31, 2017

What California Real Estate Investors Should Know About Residential Leases, Titles and Deeds, July 26, 2017

Defining “Projects” in a California Real Estate Partnership Agreement, Titles and Deeds, May 18, 2017

Photo credit: Photos public domain [Public domain], via Wikimedia Commons.