By Seth Lane, Front Street Commercial Real Estate Director
In commercial real estate, there are many ways a lease can be structured. It is important when negotiating a lease, whether as a tenant or a landlord, that you consider the impact the lease structure will have on your business.
Since the needs of landlords and tenants vary widely, knowing the various lease structures and how these could impact your business are vital to a successful landlord/tenant relationship.
Often, the landlord’s motivation in securing a particular lease structure is instilling predictability and consistency for future budgeting, cash flow and profit management. A tenant may have much different motivation, such as keeping initial costs low, understanding future liabilities or not being tied to a long lease term.
Whatever your motivation, the following summary of typical lease types provides a good foundation of understanding.
Gross Lease: In a gross lease scenario, the tenant only pays rent. Expenses associated with the ownership and operation of the property, such as taxes, insurance and common area maintenance (CAM) are the responsibility of the landlord.
Full Service Lease: In a full service lease, the landlord provides additional services such as utilities, janitorial, maintenance or security to the tenant. These services, as well as taxes, insurance and CAM, are provided to the tenant under the agreed-upon rental fee.
Net Lease: In this scenario, the tenant pays rent plus a portion of building operating expenses. The operating expenses that are passed through to the tenant are based on actual cost, not estimated costs.
Net-Net Lease (NN or Double Net Leases): This is similar to a net lease, but the tenant is responsible for additional expenses associated with owning a property, such as real estate taxes or insurance.
Net-Net-Net Lease (NNN or Triple Net Lease): In a NNN lease, the tenant pays a base rental amount plus his or her proportionate share of the landlord’s operating expenses. These expenses include real estate taxes, insurance, maintenance and repairs.
Absolute NNN Lease: The tenant is responsible for base rent and all expenses associated with owning and maintaining the building being leased.
Land Lease or Ground Lease: In this scenario, tenants are only leasing the property. The building constructed is the sole property and responsibility of the tenant. However, at the termination of the lease, all property, including improvements and buildings, become property of the landlord.
Other useful terms:
Escalator Clauses: A provision that increases the rent over the course of the lease term.
Percentage Rent: The tenant pays either base rent plus additional rent based on an agreed-upon percentage of business income, or base rent is solely the agreed-upon percentage of business income.
Seth Lane practices in the area of brokerage, consulting and development with Front Street Commercial Real Estate Group. Front Street is invested, donating 10 percent of all revenues to charity. Call 352-505-3844, or visit www.frontstreet.net for more information.
Understanding Office Classifications
If you have spent some time looking for office space, you have certainly come across properties being advertised as Class A, Class B or Class C. While this nomenclature is common, there is no industry standard or universally accepted set of measures used to classify an office property. While general parameters exist, classifying properties is still a subjective process based on the market, property owner and even the property’s listing broker. Here are a few rules of thumb:
• Class A is considered to be new or in like-new condition. The property is well constructed, using high-quality materials. The interior should have a contemporary look and have modern conveniences, such as easy access to high-speed communications. A Class A classification can also be predicated on location. Between the condition of the building and the property location, Class A space typically commands the highest rental rates in the market.
• Class B should be in good condition with little need for major renovations or updates. When compared to Class A properties, Class B are typically a bit older, may have less amenities or upgrades or may be in a location with a slightly lower demand. Class B space is easily rented but commands a lower rental rate.
• Class C space is typically characterized as being in need of significant interior or exterior updating or as having a functional obsolescence. This may include a site plan configuration that is no longer in demand or having interior infrastructure that does not support modern technology. Like the other classifications, a poor or undesirable location may cause a property to be labeled as Class C.