A Breakdown of Landlord Responsibilities for Commercial Property

Ready to take the leap from residential to commercial real estate? It's not just a bigger playing field; it's a whole new ballgame. If you've been in the residential investment space and are eyeing commercial properties, get ready for a different set of rules and rewards. What changes when you cross over to the commercial side? How do your responsibilities shift? What can business tenants expect from their new landlords?

This article breaks down the key responsibilities of both landlords and tenants in commercial real estate. We'll explore what sets commercial leases apart from residential ones, what landlords should know when making the switch, and what business owners need to understand before signing a lease. From different lease types to legal obligations, get the details you need to make the best decisions for your business.

Commercial leases vs. residential leases

A good place to start in your journey to understanding commercial leases is learning how commercial and residential leases differ from each other. Here's a few key areas to be aware of:

Terms

You'll find that commercial leases typically have longer terms, ranging from 3 to 10 years. This provides small business owners with stability for their company, but it also locks the contract in for a while.

Residential leases have shorter terms of one year or may offer month-to-month options.

Legal protection

There are fewer regulations protecting commercial tenants compared to residential ones. The assumption is that commercial tenants are savvy business people who can negotiate and understand complex terms.

The law provides more protections for residential tenants, covering areas like security deposits, privacy, and habitability standards.

Negotiation

Tenants and landlords have more room to negotiate in commercial leases. Almost everything can be on the table, from rent amounts to who's responsible for what.

Residential leases have standardized terms, and even though tenants might negotiate small things, like pet policies or minor repairs, they can't change the whole agreement.

Responsibilities

In many commercial leases, tenants are responsible for much more than just paying rent. They may handle maintenance, property taxes, and insurance.

In residential leases, tenants are responsible for rent, utilities, minor maintenance, and keeping the rental unit clean.

Cost

Commercial space costs more than residential since landlords price rent per square foot, which adds up quickly. These higher rates reflect the business value and income potential of the leased space for business owners.

Residential tenants pay a flat monthly rate for their living space.

Eviction

Commercial tenants have fewer protections than residential tenants. The eviction process for commercial properties can vary depending on the specific lease terms, state laws, and circumstances of the eviction.

State and local governments have rules for protecting residential tenants. Landlords must follow strict eviction procedures to make sure renters have access to fair treatment and housing stability.

Types of commercial leases

The different types of commercial lease types that you may see in this area of real estate investing include:

Full service lease

This type of lease is also called a gross lease. The tenant pays base rent and utilities, and then the commercial landlord covers all building expenses, like taxes, insurance, and maintenance. You'll often find this structure in multi-tenant office buildings.

Net lease

This type of rental agreement lowers the base rent for the tenant, but the trade-off is that the tenant takes on more cost responsibilities. Net leases come in three types:

• Single net lease: The tenant pays rent plus property taxes.
• Double net lease: Rent, taxes, and commercial property insurance fall on the tenant.
• Triple net lease (NNN): In a triple net lease, the tenant covers rent, taxes, insurance, and maintenance. A different version of this is the absolute net lease where the tenant is responsible for all building-related expenses, even structural repairs.

Modified gross lease

This lease type is a hybrid between gross and net leases. The tenant pays base rent plus a portion of operating costs. It's a middle ground that spreads some risk between landlord and tenant.

Percentage lease

You might see this lease type in a retail commercial lease, where a tenant pays a base rent but also pays a percentage of their sales revenue to the landlord.

It's a way for landlords to share in the success of a well-located retail spot while potentially offering a lower base rent to attract tenants.

Commercial landlord obligations

As a commercial landlord, your responsibilities mirror those in residential real estate, but with a few slight variations:

Screening commercial tenants

Commercial landlords should thoroughly evaluate potential tenants, looking at both business and owner credit. You'll want to choose tenants carefully and make sure they have enough revenue to cover rent.

This screening process helps avoid long-term leases with businesses that can't sustain the cost, reducing your risk and opportunity cost of the wrong tenant.

Lease agreements

Negotiating a commercial lease agreement can be a process for both the landlord and the tenant. No two leases are alike, and many have room for negotiation. Here are some key points and commercial lease tips to keep in mind:

• Tenant improvements (TIs): These are modifications to the space for the tenant's business needs. You can negotiate who pays for these changes and if there's a TI allowance.
• Common area maintenance (CAM) charges: Landlords are responsible for the upkeep of common areas, but tenants may pay a share of the costs.
• Sublease and assignment rights: Negotiate terms for the tenant's ability to sublease or assign the lease if business needs change.
• Renewal options: Lease negotiations should cover areas like lease extensions and rent adjustments.
• Maintenance and repairs: Commercial leases should define each party's maintenance responsibilities.

Collecting rent

Commercial property owners are responsible for collecting rent from their tenants. The most common methods include electronic funds transfer (EFT), automated clearing house (ACH) payments, checks, and online payment portals.

Maintenance and repairs

The lease agreement spells out who's responsible for what when it comes to maintenance and repairs. Here's the general breakdown:

Commercial landlord responsibilities

• Structural repairs: Landlords handle areas like roofing, exterior walls, foundation, and floor issues.
• Major building systems: A commercial landlord is responsible for elevators, HVAC, plumbing, and electrical systems.
• Common areas: Parking lots, bathrooms, and shared hallways fall on the landlord's to-do list.

Tenant responsibilities

• Ordinary repairs: Tenants deal with the areas inside of their rented space, like partition walls, stairways, windows, and carpet.
• Cleaning: Keeping the space clean is another one of the tenant's maintenance responsibilities.

Commercial property insurance

To protect your investment, make sure you get the right commercial insurance coverage. Here's what you should look for:

• Property insurance: Protects the building structure and other physical assets against damage from fire, storms, theft, and other perils.
• General liability insurance: Covers legal costs and damages if someone gets injured on the property.
• Loss of income insurance: Compensates for lost rental income if the property becomes unusable due to a covered event.
• Umbrella liability policy: Provides additional liability coverage beyond the limits of other policies.
• Workers' compensation: If you have employees managing or maintaining the property, you'll need to buy this insurance as part of your commercial landlord responsibilities.

Legal compliance

As a commercial property owner, you need to stay on top of legal compliance and follow regulations around:

• Local rules: This includes areas like zoning laws, building codes, and occupancy limits.
• ADA and fair housing: Maintain accessibility requirements and fair housing laws in commercial spaces.
• Commercial landlord-tenant laws: These differ from residential rules, so make sure you know the specifics for your location.

Tools for managing commercial properties

Being a commercial landlord involves juggling many responsibilities. Luckily, there's technology to make your life easier. Property management software like Azibo can streamline your operations and help you stay on top of operations. Here's how it can support you:

• Rent collection: Azibo makes it easy to collect rent online. You can set up automatic payments, send reminders, and track transactions. Tenants can pay using ACH transfers, credit cards, or debit cards. This cuts down on late payments and boosts your cash flow.
• Maintenance and messaging: If you are responsible for maintenance, Azibo provides an online platform for tenants to submit requests. You can receive alerts, track requests, manage repairs, and chat with renters in one place. It's a single online location for property upkeep and tenant communication.
• Insurance coverage: When it comes time to buy commercial insurance, check out Azibo's options for coverage to protect your investment. From property and liability coverage to specialized policies tailored for unique risks, you'll find comprehensive solutions to make sure you're well-covered.

Commercial lease landlord obligations

Commercial real estate presents opportunities and challenges for landlords and tenants alike. Investors who are moving from residential to commercial properties should adjust their strategies and expectations. On the other side of the deal, it's important for business owners to understand lease terms and their landlord's responsibilities to support their company's growth.

Commercial properties offer an exciting way for real estate investors to diversify their portfolios. For businesses, commercial property is all about finding the perfect space to operate and thrive. Successfully managing these dynamics can lead to rewarding outcomes for both parties.

Commercial landlord responsibilities FAQs

How do you evict a commercial tenant in Arizona?

To evict a commercial tenant in Arizona, first provide written notice with the reason and remedy time, such as 5-10 days. If the tenant doesn't comply, file an eviction complaint and attend the court hearing. If you win, obtain a writ of restitution. Law enforcement will remove the tenant if they don't leave voluntarily.

What repairs are commercial landlords responsible for in California?

California commercial landlords are typically responsible for structural repairs, roof repairs, and ensuring compliance with building codes and safety regulations. The specific responsibilities may vary based on the lease agreement.