What kind of Lease do I have?
by Neil Dailey, The Baskin Real Estate Specialists

Often I get questions from clients asking about specific commercial lease questions and it leads us to a complete review of the lease or rental agreement with their Landlord. There are several terms that are frequently used incorrectly and generally lead to large misunderstandings when discussing or negotiating. It happened again this week when speaking with a long time client and so I thought I would dedicate my column this month to spelling out the basics.
A wide range of commercial leasing possibilities exist. Typically, an office lease in a major city and a retail lease in a suburban shopping center will be considerably different.
From a broad perspective, there are a few types of leases commonly found. Within these categories, leases may vary considerably.
• Gross lease: The tenant pays a set amount of rent and the landlord is responsible for payment of taxes, insurance and other costs associated with owning the property. (This is most commonly seen in office buildings. The tenant will pay a negotiated amount and the Landlord will pay the expenses for the building. If there is a shortfall or surplus in the annual expenses in the building, the Landlord will generally reconcile the difference at year end and allow a credit or bill for the repayment of the deficiency within a certain number of days.)

• Net lease: The tenant pays the rent plus a portion of the maintenance fees, insurance premiums and other operating expenses. (This is most commonly seen in small to mid-sized retail leases where all the tenants share in the common area expenses such as lighting, parking facilities, landscaping, etc.)

• Triple-net lease: Typically, for a freestanding facility, this type of lease has the tenant paying for all fees and operating expenses associated with the space. (“Triple Net” meaning: The Landlord/Owner is Net of taxes, Net of insurance and Net of maintenance expenses and responsibilities. These costs and responsibilities are passed on to the Tenant. In other words, the Tenant pays ALL expenses. If the roof leaks, don’t call the owner, call a roofer. If the toilet leaks, don’t call the owner, call a plumber. These type of leases are most common in stand-alone retail buildings as small as a bank branch location or fast food restaurants and as large as Home Depot’s or Ultimate Electronics facilities which are owned by an entity and leased back to a national tenant.)

• Shopping center leases: The tenant pays a base rate in conjunction with the square footage of the retail facility. Typically, the tenant will also pay some common charges and frequently a certain percentage of the gross sales. The tenant may also be assessed part of the property taxes. A shopping mall lease will often include terms about signage, hours of operations, common areas and deliveries. The landlord may also have the right to relocate the tenant. (These leases are common with indoor mall tenants such as The Gap, Abercrombie & Fitch Co., Finish Line, etc. Generally the Landlord will retain a lot of remedies to use in negotiating tenant needs, expansions, relocations, gross sales quotas, etc. that are used to ensure they can maintain favorable tenants or dismiss unpopular ones and also maximize the mall space to generate the most rental income.)

• Land or ground lease: The tenant leases the grounds and builds on the property. Typically, with a land or ground lease, all improvements on the property, including any building or buildings revert back to the landowner at the end of the lease period. (These leases are generally in the 30-99 year range and may have renewal options to allow for continued business. They are almost always accompanied by stringent guidelines, that if not followed, would cause the lease to end prematurely and the building to come back under the Landlord’s ownership.)
There are numerous variations on common lease forms so be sure to talk with a Baskin Real Estate Specialist before signing your next lease or renewal option 918-258-2600.