Commercial leases are written by and for landlords. As a school founder, you are likely signing one of the largest financial commitments of your organization, and the terminology can be opaque. This guide breaks down the most important lease concepts in plain language so you know what you are agreeing to, and how your lease fits into your overall financial picture.
The two most common commercial lease structures:
Gross lease (full-service): You pay a single monthly rent that includes most operating expenses. The landlord covers property taxes, insurance, and maintenance. Simpler to budget, but the base rent is higher.
Triple Net Lease (NNN): You pay a lower base rent plus your proportional share of three additional costs: property taxes, insurance, and Common Area Maintenance (CAM). NNN is the most common lease structure for schools.
The formula: Gross Rent = Base Rent + Operating Expenses (NNN)
With NNN, your actual monthly cost is Base Rent + NNN Charges. NNN charges typically add $3 to $8 per square foot per year, depending on the property. Always ask the landlord for the current year's NNN estimates and at least two years of actuals.
Common Area Maintenance (CAM) is the landlord's cost to maintain shared spaces and building systems. It typically includes:
Watch out for:
Most commercial spaces need modifications to function as a school. Tenant Improvement (TI) allowances are the landlord's contribution to those build-out costs. This is also known as leasehold improvements -- custom renovations to leased spaces, funded by either the tenant or landlord.
How TI works:
Common school build-out needs:
TI allowances are negotiable. Longer lease terms (7-10 years) often come with more generous TI because the landlord recovers the cost over more years of rent.
Almost every commercial lease includes annual rent increases. Common structures:
For schools, fixed escalations of 2-3% are ideal because they allow accurate long-term budgeting -- essential when your revenue is relatively predictable.
Understanding these financial metrics helps you evaluate the cost of a lease:
Debt Service Coverage Ratio (DSCR) measures how well your school can cover its annual debt payments with income.
Maximum Annual Debt Service (MADS) is the highest amount your school will owe in debt payments in a single year over the life of a loan. Lenders use MADS to assess if your school can handle future obligations. Aim for MADS to be less than 15% of total revenue.
Facilities margin: Target 20-24% of recurring public revenue for total facility costs (debt service + M&O combined).
A triple net lease means the tenant pays a lower base rent plus their proportional share of three operating expenses: property taxes, insurance, and common area maintenance (CAM). NNN is the most common lease structure for schools. Your total cost is: Gross Rent = Base Rent + Operating Expenses.
Aim for a Debt Service Coverage Ratio of at least 1.15 at full enrollment. Early-stage schools may need philanthropy to achieve at least 1.1 while enrollment is growing. A DSCR below 1.0 means the school cannot cover its debt payments from operating income.
Tenant improvement allowances typically range from $15 to $40 per square foot, depending on the lease term, property condition, and local market. Longer lease terms (7-10 years) generally come with more generous TI because the landlord recovers the cost over more years of rent.
MADS is the highest annual debt payment (principal plus interest) your school will owe in any single year over the life of a loan. Lenders use it to assess debt capacity. Aim for MADS to be less than 15% of your total revenue.