Besides rent, commercial tenants who rent space incur a number of occupancy costs. They may include common area maintenance, property tax payments and other expenses beyond their monthly rental payment. When you negotiate a commercial lease, it’s important to find out from the broker what other expenses are associated with leasing the premises.
In many cases, among the extra costs you may incur as a tenant are commercial lease tax and renters’ insurance.
Commercial Lease Tax
Depending on the municipalities where you lease your rental space, you may be liable for the payment of a commercial rent tax. This is a tax charge by the municipality, in addition to the “base rent” or “rent,” and other occupancy costs:
Water and sewer charges
Real estate taxes
Other costs assessed to the tenant
Rents do not include expenses incurred repairing, maintaining or improving the tenant’s premises.
Generally, a commercial lease would cover end trades, professional vocations or commercial activities related to the leasing of space in a particular tax year. The rules apply whether you are a business tenant, lessee, sub lessee, concessionaire or licensee, who must pay a base rent that equal or exceed a certain amount.
Even if you have a business located within a department store, such as a florist, barber, beauty parlor, or optometry establishment, you can be liable for the tax. Refer to the regulations governing your municipality to determine if specific exceptions apply to your situation. For example, in New York the rules allow for the reduction of the base rent amount by 35% for tenants leasing space in Manhattan south of 96th Street. In some locations, adjustments are made when a portion or all of a tenant’s monthly rent depends on the gross sales of the establishment.
Usually, the tenant must pay the commercial lease tax to the municipality where the property is located.
Commercial Renters Insurance
If you rent an office, warehouse or other commercial space, you have direct responsibility for any property store on the premises. In most cases, you will also incur an obligation to reimburse the owner for any damage caused to the space. You can protect yourself against these costs by purchasing commercial renter’s insurance (business or commercial property insurance), which reimburses you in case of stock damage or theft of office equipment.
In addition, the policy provides coverage in case you cause damage to the rental property.
Standard coverage: Business insurance policies usually cover damage or destruction of property cause by fire, vandalism, adverse weather and other common risk as outlined in the policy. Standard coverage also covers the theft of inventory, business records and manufacturing and office equipment. It also provides a safeguard against a visitor of the premises should they file a lawsuit. Some polices also cover the loss of cash and other valuables.
Additional coverage: Many businesses in flood-prone areas purchase additional coverage to protect themselves against flood damage. You can also add on coverage for glass and windows displays and for air conditioners installed in the space. Adding a business interruption insurance rider to your commercial rental policy ensures reimbursement if you're not be able to operate your business due to property damage or theft.
Determine Occupancy Cost Before Bargaining
Prior to negotiating your commercial lease, obtain an operating budget for the property or an itemized list for all costs for which you will be liable. This will ensure that you have all the occupancy cost data that would be associated with your occupancy and that the final expenses fit within your budget. Always engage a tenant rep broker to help you with the process.
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