Chapter 1 · Commercial Leases 101
Renting retail space works differently than renting an apartment. This is the vocabulary and structure of a commercial lease, explained from zero.
Learning objectives
- Understand "base rent" and the three common lease types: gross, NNN, and percentage.
- Know what CAM charges and "additional rent" are — and how they hide costs.
- Walk into any lease conversation knowing the right questions.
- Understand what vacancy actually costs the landlord — and why that is your leverage.
The first shock: it's not an apartment lease
Commercial leases are longer, pricier, and structured for businesses. You (the tenant) rent from a landlord (a.k.a. lessor) for an agreed term (often 3–5+ years), and you're responsible for a lot more than just the monthly check. The headline rent is often not what you actually pay — that's the thing that catches beginners.
Base rent (the number on the sign)
Commercial rent is quoted per square foot per year, then divided into monthly payments. Example:
Small-shop retail rents typically run ~$1.50–$4.00/sq ft/month (≈ $18–$48/sq ft/year) depending on market, though prime malls or high-foot-traffic streets cost far more. You'll see "NNN" or "$X/sq ft NNN" attached — see below.
As a frame: a ~1,200 sq ft shop at ~$20/sq ft/year (a common mid-size-city rate) is ~$2,000/month base, plus CAM/taxes/insurance add-ons (often another ~$3–$8/sq ft/yr = ~$300–$800/month). Big metros are pricier (Greater LA asking ~$31/sq ft/yr; prime mall/street far more), smaller metros cheaper (~$12–$25/sq ft/yr). Always get the all-in monthly number, not the quoted per-sq-ft rate.
The three lease types (the crucial distinction)
1 · Gross lease
One all-in rent. The landlord covers taxes, insurance, and common-area upkeep out of the single number. Simplest to budget — but the landlord bakes those costs in, so it may look slightly higher per sq ft. Best for beginners who want predictability.
2 · NNN lease (Net-Net-Net) — very common in retail
Your base rent is plus three "nets": property taxes, building insurance, and common-area maintenance (CAM). You pay your share of these pro-rated by your square footage, estimated monthly and reconciled yearly. The quoted "$2.00 NNN" is not what you'll actually write each month — the NNNs can add 30–100%+ on top.
For a beginner, "$2.00 NNN" and "$2.00 gross" are not the same number. NNN means expenses on top. Always ask "what is my all-in monthly rent including all additional charges?" before comparing spaces.
3 · Percentage lease (retail landlord's favorite)
A base rent plus a percentage of your gross sales above a threshold. Common in malls. It means your rent scales with how well you do — good if you're slow (you pay less) but it eats into margin when you're busy, and it forces accurate sales reporting to the landlord. For a first claw shop, a straight gross or NNN lease is usually simpler than a percentage lease.
Other terms that matter
- CAM / Common Area Maintenance — upkeep of shared areas (parking lot, walkways, lights). In NNN leases you pay your pro-rata share. Always ask what CAM includes.
- Triple net's ugly cousin — "additional rent." Any charge above base rent is often lumped under "additional rent." Get a written breakdown.
- Security deposit — typically 1–3 months' rent; some landlords want first + last + deposit. Budget for it.
- Term length — 3 years is a common minimum; longer terms get better rates but lock you in. For a first business, a shorter term (with renewal option) is often wiser.
- TI (Tenant Improvements) — who pays to build out the space? Sometimes the landlord gives a "TI allowance." For a claw shop (drop-in machines, minimal build), you may need little to no construction.
- Use clause — what you're allowed to operate. Make sure it clearly permits an amusement/arcade/retail use (and any local arcade restrictions — see Vol 2 · ch 3). Getting this wrong is a lawsuit later.
The questions to ask any landlord (print this)
- What is my all-in monthly cost (base + taxes + insurance + CAM + any fees)?
- What is the security deposit and are there first/last-month requirements?
- What is the term, and is there an option to renew? Can I exit early (sublet/assignment)?
- Does the lease permit an amusement/arcade/prize-vending use at this address?
- Who pays for tenant improvements, signage, and electrical work for my machines?
- How is CAM calculated and reconciled?
- Any percentage rent, and how is gross sales defined/reported?
The landlord's side of the table (why vacancy is your leverage)
Everything above is your side of the deal. It's worth ten minutes on their side, because it explains the landlord behaviors that otherwise look irrational — the rent that won't come down, the free rent they'll happily hand over, the personal guarantee they insist on.
Remember the mechanic of an NNN lease: you carry the building. Property taxes, insurance, and CAM are all on your side of the ledger. That means the landlord's day-to-day operating cost is close to zero while you're in the space — and the moment a tenant leaves, every one of those costs flips back onto them. As one property manager puts it: "Once a tenant moves out, there's no one to pass the three nets to, and all of them land back on the landlord until a new lease starts." (HomeRiver Property Management)
Property taxes still come due on schedule, and insurance has to stay in force — "often at a higher rate once the building sits vacant," because an empty building is a higher insurance risk. Add the mortgage (debt service never pauses), security, utilities for showings, and basic upkeep, and an empty unit is a monthly bleed, not a break. (HomeRiver Property Management)
Then the part that makes it worse than a simple cash-flow hit. Commercial property is valued on income — net operating income divided by a cap rate — not on comparable sales the way a house is. So a vacant unit damages the landlord twice: less income this year, and a lower appraised value. Lenders model it explicitly, as both "in-place" vacancy (what's empty right now) and "stabilized" vacancy (what they expect over time). (MMCG Invest)
What else the landlord pays (even with a tenant in place)
Even a "hands-off" NNN deal isn't fully hands-off. The landlord typically keeps four things: the structure and roof; the mortgage (debt service); income tax on the rent collected; and capital reserves — the fund for the roof replacement, the parking-lot resurfacing, the HVAC swap. Those reserves aren't a formality: lenders commonly size them per square foot (multifamily runs roughly $250–$350 per unit per year), and will often deduct an underwritten reserve from NOI even when they never collect a dollar of escrow. That deduction lowers the appraised value, which lowers the loan amount. (MMCG Invest, KQT Advisors)
Every month a unit sits empty, the landlord pays full freight with no income. A credible, ready-to-sign tenant is genuinely valuable to them — which is why free rent is such a winnable ask: it costs the landlord far less than another few months of vacancy, while it's real cash in your pocket during your slow opening. The same logic covers a TI allowance and a shorter term. You're not asking for a favor; you're pricing their risk. Just remember it cuts both ways — the busier the location, the less they need you, and the personal guarantee is their protection against a young LLC walking away.
Summary
A commercial lease's headline rent is rarely your true cost. Understand base rent per sq ft, and whether you're in a gross (all-in), NNN (expenses on top — the retail norm), or percentage lease. Always get the all-in monthly number, the deposit, the term, the use clause, and who pays for improvements — before you compare spaces.
Checklist
- ☐ Know the difference between a quoted gross vs NNN rent.
- ☐ Can compute "all-in monthly rent" for a candidate space.
- ☐ Have a written list of questions for any landlord (above).
- ☐ Understand CAM, security deposit, term, and the use clause.
Looking ahead
With the vocabulary down, Chapter 2 shows you where to actually search for retail space and how to judge foot traffic.