Getting the Full Treatment with a Gross Lease
With the terms of a gross lease, the landlord receives the gross amount of money in rent and pays all expenses associated with the property. If you’re entering into a gross lease as a landlord, you agree to be responsible for all the expenses that are normally associated with ownership: taxes, maintenance, utilities, insurance, and repairs.
Using a Single Net Lease to Get Your Tenant to Share the Expenses
If you thought that a net lease dealt with fishing or butterfly collecting, you’re going to be slightly disappointed. Instead, with a net lease, the landlord receives a net sum and the tenant pays for some of the expenses. These expenses, which are paid by the tenant, can include utilities, repairs, insurance, or taxes. Different types of net leases are defined by the expenses that are or are not included.
A single net lease, for example, is a net lease where the tenant pays a monthly amount in rent and the property taxes as well. With this type of lease, the property owner/landlord is still responsible for all the other expenses, such as utilities, maintenance, and so on. For instance, the landlord can include a charge of $200 per month toward the taxes, $600 per quarter, or some such arrangement. If the landlord deposits this tax payment into a separate account, the interest can be earned on the payments — quite a bonus!
Signing a Double or Triple Net Lease
A double net lease is a lease where the tenant pays the monthly set amount along with the property taxes and property insurance. With a triple net lease, the tenant pays the property taxes, property insurance, maintenance, and monthly rent. In both situations, the landlord is still responsible for all the other expenses.
The double and triple net leases are conventional arrangements. But there’s no reason that you can’t get creative and set up a quadruple net lease, a quintuple net lease, or a sextuple net lease. (Okay, I went a bit overboard here; this is beginning to sound like a discussion of multiple births.) In any case, a properly executed lease can be set up to meet the needs and desires of the landlord and the tenant. Spelling out all the details in a lease helps avoid confusion as to who’s responsible for what.
Trying Out a Percentage Lease
A percentage lease is arranged to benefit both the landlord and the renter. The landlord benefits by sharing in the business tenant’s good profits, and the renter benefits when the business is in a slump or down period. Percentage leases make sense for businesses that fluctuate with the seasons, but they also make financial planning difficult. Another downside is this: Even though a landlord receives more money with a percentage lease when the tenant’s business is good, the additional revenue may be offset by greater expenses, such as utilities, if a net lease is in place.
Stepping It Up with a Step Lease
Over the course of the lease term, the rent can increase at predetermined amounts. These amounts are negotiated at the beginning of the lease term. With a step lease, the landlord accepts smaller amounts of money at the beginning of the term, expecting to benefit from the success of the enterprise after it takes hold. At the same time, the building is appreciating in value, and the landlord has a tenant locked in. With a step lease, each step may be the same over the term of the lease, or it may have unequal steps that reach the same level in the end.
Inserting Expense Provisions into Your Lease
When you’re entering into a lease as a landlord, you have to be sure to protect yourself. You can do so by adding specific clauses and provisions. For example, an expense stop provision protects the landlord from excessive expenses. And an allowance per foot clause can secure the promise of renovations and cooperation while the renovations or changes are being made.
When negotiating for commercial space, you sometimes want to include improvements to the property as part of the contract. In some cases, those improvements are the landlord’s responsibility, and sometimes they’re the tenant’s responsibility. When the tenant takes on the improvements, he or she may be able to negotiate a reduction in the rental amount. Of course, the landlord wants to have some control over the quality of the work being done and expects all permanent fixtures to be left in place when the tenant leaves.