The broker’s role is to negotiate the business terms of the transaction for the party they represent. The type of transaction usually depends on the type of property involved, and is determined long before the negotiating stages begin. Following is a summary of the kinds of transactions in which you might be involved. The following definitions are generalized and are for overview purposes only. Your broker and legal counsel should clearly delineate any contemplated transaction in the lease or sale agreement.
In a GROSS LEASE, the tenant usually pays a fixed monthly rent; landlord pays real estate taxes, property insurance, common area expenses and all other operating costs, including, in many cases, utilities. Janitorial services may also be paid by landlord, in which case, the lease is call a “full-service” lease.
“Net” Leases usually indicate that the tenant is responsible for it’s proportionate share of a portion or all of the operating expenses for the property in addition to base rent and the landlord is responsible for the balance of the operating expenses, including any mortgage payments on the property. The tenant’s proportionate share of the operating expenses is usually calculated by determining the square footage of the tenant’s space relative to the total building square footage expressed as a percentage figure (tenant’s “prorata share”). Tenant’s prorata share is then multiplied by the cost of the property’s operating expenses to determine the actual cost of the operating expenses allocable to the tenant.
There are no industry-wide accepted definitions for the various types of “Net” Leases and definitions will vary among landlords and brokers, even within the same market. Therefore, caution is urged when using these terms and they should be carefully defined when negotiating a lease. The operating expenses associated with “Net” leases are typically broken down into three “Net” components:
•Real Estate Taxes
•Common Area Maintenance (“CAM”)
CAM costs typically include maintenance of the common areas of the property exclusive of costs to maintain the tenant’s space. For example, CAM costs include lawn care, snow removal, pest control, elevator maintenance, roof and parking lot repair, management fees, cleaning of corridors, lobbies and parking lots, maintenance and repair of shared mechanical, electrical and plumbing systems, etc. In most leases, the landlord is responsible for structural repairs to the overall building and site improvements.
Types of “Net” Leases
Reference is usually made to:
•”Net” (or “single net”) Leases
•”Net Net” (or “double net”) Leases
•”Triple Net Leases”
Net Lease – In a single net Lease, in addition to base rent, the tenant is usually responsible for it’s proportionate share of one of the three “Net” expenses (e.g. taxes, insurance or CAM) referred to above and the landlord is responsible for the other two “Nets”. However, sometimes reference to a Single Net Lease may imply that the tenant only pays for utilities (e.g. gas and electric expenses.) Yes – it is confusing!
Net-Net (“double net”) Lease – In a “Net Net” Lease, in addition to the base rent, the tenant is usually responsible for it’s proportionate share of two of the three “nets”
Triple Net Lease – In a “Triple Net” lease, in addition to the base rent, the tenant is usually responsible for it’s proportionate share of all three “nets” (i.e., all operating expenses) as well as utilities and janitorial costs.
Absolute Net Lease – Same as a “Triple Net” Lease except tenant is still responsible for paying rent and all operating expenses even if the premises are destroyed by casualty (e.g. fire) and Tenant may also be responsible for structural repairs.
Bond Lease – Same as “Absolute Net” Lease except Tenant is still responsible for paying rent even if the property is taken by municipal condemnation.
In a Percentage Lease, rent is based on a percentage of gross sales generated from the leased premises. The percentage takes various forms: straight percentage of sales with no minimum base rent amount; minimum base rent plus a percentage of sales, minimum base rent plus percentage of sales, with a ceiling on the percentage amount. This type of lease is typical of retail, not office or industrial leases.
A Ground Lease is a lease on the land alone, usually a long-term Absolute Net Lease (except for land condemnation). Land ownership and improvement ownership are kept separate: the tenant usually owns the building improvements until the end of the lease term.
Under a Sublease, the tenant (sublandlord) leases some portion of its leasehold interest to another tenant (subtenant) while keeping some interest in the premises and remaining liable to the landlord for the rent. The subtenant usually pays rent to the sublandlord who, in turn, pays the landlord.
Under Assignment, the tenant (assignor) transfers its leasehold interest in the leased property to another tenant (assignee) but the assignor may still remain liable to the landlord for the rent. The assignee usually pays rent directly to the landlord.
Build-To-Suit to Lease
Under the Build-To-Suit option, the landlord agrees to develop or finish the property or space to the specifications of the tenant, with the build-out cost usually amortized over the term of the lease in the form of increased rent.
Under a Lease-Purchase, the lease usually stipulates a purchase price amount and an outside date for completing the purchase but the tenant initially leases the property until the purchase date. Some portion or all of the lease payments may be credited to the purchase price. The tenant pays the balance of the purchase price at a defined point in time stipulated in the lease and the deed then transfers to the tenant, who then owns the property.
Lease With Purchase Option
Under a Lease With Purchase Option, the tenant enters into a lease with the landlord and the tenant retains the right to purchase the property from the landlord. The purchase date and purchase price amount may or may not be stated in the lease. The purchase price amount, if stated in the lease, will usually be a fixed price or it is determined by a pre-agreed upon formula which is stated in the lease, for determining the purchase price at the time the purchase occurs. A Lease With Purchase Option usually does not require the Tenant to purchase the property whereas usually a Lease-Purchase does.