admin / February 27, 2019
If you are a business owner and are not in a position to own or purchase real estate, you will be leasing space to house your operation. The property size, location, age, condition and use will influence whether a Gross Lease or Triple Net Lease will be utilized. The terms that make up the Industrial Lease are largely the product of negotiation between the Landlord, Tenant, their agents and their attorneys. Industrial Lease agreements typically come in two forms, “Triple Net” and “Modified Gross” leases. These two forms of property leases are distinct due to their allocation of costs, maintenance and replacement obligations between tenant and landlord. A small business owner should know the differences before signing a lease agreement.
In my experience, the age and condition of the building typically drive the implementation of the Net or Gross lease form. Newer buildings with newer structural and mechanical components (ie., Roofs, HVAC, Utilities and Truck doors) typically can justify a Net Lease. Older buildings (older than 20 years) usually justify Gross Leases.
Some of the reasoning is the life span and warranty period for most major structural components is 20+/- years. This is also influenced by the upkeep and maintenance of the property by the owner or prior tenant. More the reason to pay a contractor to provide a physical inspection report to establish a baseline condition of building before you enter into hard negotiations if you are the tenant. If you are the Landlord, you will have the same concerns on condition. Establish your negotiation position by knowing the state of repair and capital investment you may or may not be ready to make into your property.
Net Leases are generally either “Double Net” or “Triple Net”. In a double-net lease, the tenant is responsible for normal wear and tear maintenance costs, utilities, taxes and insurance. The owner is generally responsible for expenses incurred for structural repairs. In a triple-net lease, the tenant is responsible for all costs associated with the property, including maintenance, utilities, taxes, insurance and structural repairs.
Finally, most net and gross leases have contractually specified rental increases through the lease term. Net leases are often longer in term, are guaranteed by corporate tenants and provide a more stable income stream than those of shorter term properties leased to lesser credit tenants under a gross lease. A Gross Lease in contrast, the landlord agrees to pay all expenses which are normally associated with ownership, such as utilities, repairs, insurance and sometimes taxes. The tenant pays a fixed amount each month and nothing more. A landlord involved with a gross lease has factored in the various expenses, which may include a pro-rate share of taxes, insurance and maintenance. This is why, market knowledge and seeking proper representation from an experienced agent or attorney is important. Whether it is a “triple net” or “gross lease” it is important to know what provisions and lease terms should be excluded, included or amended to protect ones position (lessor or lessee).
As an agent, my job is to understand the property owners or business owner’s (tenant) financial as well as operational objectives. For example, an absentee property owner, most times, wants to implement a triple-net lease because they are out of the area and do not want the day to day property management responsibilities. A triple-net lease has tenant wiring in rent checks to the landlords bank account each month and landlord does not have to be concerned with upkeep or miscellaneous expenses.
A tenant on the other hand, needs to be aware of the risk and exposure a net-lease presents. If not negotiated knowledgeably, under a net-lease the tenant may be strapped with the responsibility of replacing a roof, repairing underground utilities, replacing HVAC units, painting the exterior of the building, paying for fire sprinkler certification and other costs associated with a poorly negotiated triple-net lease agreement.
The message here is to arm yourself with market knowledge, secure a good agent to represent your best interests, whether you are a Landlord or Tenant. Negotiating from a position of knowledge and strength is always the goal. Structuring a win-win transaction, especially with leases running 5-10 years in length, helps establish a sound long term Landlord/Tenant relationship where economic and operational factors minimize vacancy and provide an environment for business to grow and remain profitable.
Minimizing vacancy, minimizes capital expenditures for the Landlord and Tenant. Costs associated with rehab when a tenant vacates or costs associated when a tenant relocates are expenses both sides want to avoid if possible. Down time where there is no rental income or when a company cannot produce or distribute goods affects return on investment for both parties.
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