LEASING
The world of real estate leasing is an extremely complex process...the most important tip I can give you is hire an attorney before you sign any legally binding documents.
There are various types of leases:
FLAT or STRAIGHT LEASE
- Graduated or step up lease.
- Gross lease.
- Modified lease.
- Triple net lease (NNN).
- Net lease.
- Operating Stop or Expense Stop lease.
- Percentage lease.
- Ground or Land lease.
- Turnkey lease.
- Build-to-suit.
- Sale/Leaseback.
- Sandwich lease.
- Sublease.
- Assigned lease.
- Green lease.
This column will discuss some of the lease agreements mentioned above. We will discuss the remaining leases and leasing considerations in our next column:
A flat or straight lease is a short term lease (typically month to month) that includes no rent increases, but must be in writing.
A graduated or step up lease allows the business owner to develop his or her business by establishing a customer base to support the full rent. So, for example, if the rent is $2,000 per month, the first 3 months might be $1,000, the second 3 months $1,500 and then after the first 6 months of the lease, the rent will be set at the full $2,000 per month. This type of arrangement may be an alternative to a landlord providing rent concessions to a tenant.
A full service or gross lease is one in which the landlord collects high rent and pays all the building's operating expenses from those proceeds. A modified gross lease states that in addition to the base responsible to pay the specific operating expenses.
A triple net (NNN) lease is somewhat of a misnomer. The tenant pays all of the operating expenses for the property. This lease is common in buildings with either a single tenant or only a few tenants.
A net lease is one in which the lease document will determine whether the landlord or tenant pays for specific expenses.
The operating stop or expense stop lease is the prescribed dollar-per-square-foot amount in annual property operating expenses that is the landlord's responsibility. If the operating expenses exceed a specified dollar amount, the tenant would be responsible to pay the increases as additional rent.
A percentage lease is applicable only to retail commercial properties. The tenant pays rent or a reduce rent and in addition pays the landlord a percentage of the store's sales on a calendar year basis. There may be a "breakpoint" or a "natural breakeven" point of sales before the percentage is applied. A percentage lease may also be a "straight percentage" of sales from dollar one.
A ground or land lease is essentially renting the "dirt". The tenant is responsible for constructing the building at their own expense. These leases are typically long term, between 49-99 years and feature rent escalations every 5 years or so. In addition, at the end of the lease term, all improvements revert back to the landlord. These leases are generally attractive to national retail tenants.
A build-to-suit lease would involve the developer buying a parcel of land and then seek to attract a national retailer to enter into a long term lease. The developer will build the site according to the client's plans and specifications. Once the store opens, the developer will typically sell the package to investors.
A turnkey lease is similar to a build-to-suit and involves more than basic or standard construction requirements. This type of lease would include furniture and fixtures. Upon occupancy, the tenant simply needs to "turn the key" and go right to work without any delays.
A sale/leaseback lease involves the owner of a business and the building who wishes to open another location for the business and so offers the building to an investor with a further desire to remain in the building. These leases are typically long term triple net leases and provides a definite return on investment (ROI) to an investor. In addition, the owner/landlord typically will have either a small amount of debt or no debt service in this type of lease agreement.
A sandwich lease is so called because it is a "sublease", meaning that the original tenant is "sandwiched" between the landlord and the subtenant.
A "green" lease is a pass through of the operating expense "savings" to the tenants. These lease agreements, which are becoming more common, involve:
- Lighting conversion to CFL (compact fluorescent) bulbs.
- Desk lamps which are also CFL (compact fluorescent) bulbs.
- Fixed or programmable thermostats.
- Water conservation fixtures.
- Recycling.
So, there you have it...there is clearly more than one way to draft a lease.
For more information, contact your local real estate agent.
The author, George Bakes, is a real estate agent with Coldwell Banker, 2651 via de La Valle, Del Mar, CA 92014, (858) 602-2799, george.bakes@coldwellbanker.com.
