Know your commercial lease charges
There tends to be confusion surrounding the terms used in determining exactly what rent is being charged when leasing a commercial building. Tenants are confused as well as property owners. Below is a primer on the types of rent structures you may find when leasing a commercial property in the Napa Valley.
No, there is nothing icky about it. This is actually the easiest and simplest to understand. It is very similar to a lease you may find when renting a house or apartment. The amount of rent you pay is the total. You are not charged any other fees or expenses.
Modified gross or industrial gross lease.
Here is where things start to get complicated. Besides the rent there are also additional charges. There is no standard what the additional charges may be so you need to ask. You may find it could be an increase in property taxes or insurance from one year to the next. Or, you could be assessed a monthly common-area-maintenance (CAM) charge, which usually includes property expenses such as landscaping maintenance, security, water or garbage.
There are four versions: single-net, double-net, triple-net or absolute net. You may find it described as “N,” “NN,” “NNN” or absolute net. Net expenses could include: property taxes, insurance or CAM expenses for example and are reimbursed to the landlord each month. Single-net reimbursements includes one of the expenses whereas triple-net includes them all. Absolute net is the granddaddy of them all. The tenant is responsible for all expenses pertaining to the property and is responsible for all maintenance, repairs, upgrades, etc. All the landlord is required to do is collect the rent.
This is a hybrid of the gross and NNN lease. It could include the NNN expense reimbursement (or variation) or none at all. The added extra charge is based on gross sales of the business operating in the property. This type of lease is oftentimes used in restaurants. Because a restaurant is considered an intensive use and is also dependent on location the landlord figures that if the restaurant is successful he/she should share in the success. The amount added to the rent doesn't usually kick-in until a certain threshold is met in gross sales. The tenant will pay rent each month as well as the expense reimbursement and then provide the landlord a financial report periodically and reconcile what is owed as additional rent.
As you can see in commercial real estate leasing can be a complicated ordeal. This is why many of our leases used are more than 20 pages long. I am only touching on the basics of what could be the responsibility for a tenant to pay to a landlord. This is why prospective tenants really need a broker to represent them when leasing (it doesn't cost them anything in most cases) and why a property owner needs a broker working for them.
Have any terms in your lease you just don’t understand? Let me know your questions or suggestions for future articles below.