KEVIN JONES Real Estate & Loans 818-955-SOLD (7653)
Kevin Jones, California Real Estate Broker
Burbank  818-612-1603  -  Pismo Beach  805-474-7040

Ever wonder how or what the various types of Commercial Leases there are?  Have the need to rent or lease a Commercial Space for your Business?  Here are some basic terminology and explainations to help you understand them more.

Commercial Leasehold:
Generally speaking in the modern US legal framework, commercial real property leases fall into one of just a few categories: Office, Retail, Warehouse, Ground, and a catch-all hybrid often referred to as “Mixed Use”. Each has certain typical characteristics, although Ground leases may differ somewhat, taking on some characteristics of Retail leasing when associated with a retail project, like a shopping center; and although Mixed Use projects can vary greatly depending upon the various inclusions and the size of the overall project, among other things. It is widely appreciated by those who specialize in commercial leasing, including the business side and the legal side, that, other than hybrids such as Mixed Use project leasing, Retail leasing can have the most complexity.Mixed Use projects often have elements of most or all of the other categories, not infrequently including a hotel, office building, ground floor retail with residential condominium above and a parking garage. The interplay of all these different components with each other and the underlying property documents which describe, define, and control their interactions, operation and management, as well as the division of costs for the operation of the site, are typically very complex. Retail leasing often requires the parties to address issues typically not addressed at all in other types of commercial leasing which have no retail component. These additional challenges include such topics as exclusives and restrictive covenants, radius restrictions on near-by self-competition, co-tenancy, no-build areas and visibility corridors, parking ratio assurances, signage concerns (including pylons, monuments, and criteria), CAM and CAM caps and controls (including the “cumulative” and “non-cumulative” concepts), continuous operating covenants, and much more.  CAM (Common Area Maintenance).

Leasing is less capital-intensive than purchasing, so if a business has constraints on its capital, it can grow more rapidly by leasing property than it could by purchasing the property outright.  Capital assets may fluctuate in value. Leasing shifts risks to the lessor, but if the property market has shown steady growth over time, a business that depends on leased property is sacrificing capital gains.  Because of investments which are done with leasing, new businesses are formed. Furthermore, unemployment in that country is decreased.  Leasing may provide more flexibility to a business which expects to grow or move in the relatively short term, because a lessee is not usually obliged to renew a lease at the end of its term.  In some cases a lease may be the only practical option; such as for a small business that wishes to locate in a large office building within tight locational parameters.  Depreciation of capital assets has different tax and financial reporting treatment from ordinary business expenses. Lease payments are considered expenses, which can be set off against revenue when calculating taxable profit at the end of the relevant tax accounting period.

Disadvantages of Commercial Leasing:
For businesses, leasing property may have significant drawbacks:

A net lease may shift some or all of the maintenance costs onto the tenant.
If circumstances dictate that a business must change its operations significantly, it may be expensive or otherwise difficult to terminate a lease before the end of the term. In some cases, a business may be able to sublet property no longer required, but this may not recoup the costs of the original lease, and, in any event, usually requires the consent of the original lessor. Tactical legal considerations usually make it expedient for lessees to default on their leases. The loss of book value is small and any litigation can usually be settled on advantageous terms. This is an improvement on the position for those companies owning their own property. Although it can be easier for a business to sell property if it has the time, forced sales frequently realise lower prices and can seriously affect book value.
If the business is successful, lessors may demand higher rental payments when leases come up for renewal. If the value of the business is tied to the use of that particular property, the lessor has a significant advantage over the lessee in negotiations.

NET Lease or Single Net Lease
In a single net lease (sometimes shortened to Net or N), the lessee or tenant is responsible for paying property taxes as well as the base rent. Double- and triple-net leases are more common forms of net leases.

Net-Net or Double Net Lease
In a Double Net Lease (Net-Net or NN) the lessee or tenant is responsible for real estate taxes and building insurance. The lessor is responsible for any and all expenses incurred for structural repairs and CAM. Double net leases are rarely used.

Net-Net-Net or Triple Net Lease (NNN)
A triple net lease (Net-Net-Net or NNN) is a lease agreement where the tenant or lessee agrees to pay all: 1.) real estate taxes, 2.) building insurance, and 3.) building maintenance (the three ‘Nets’) on the property in addition to any normal fees that are expected under the agreement (Rent, CAM, etc.). In such a lease, the lessee is responsible for all costs associated with repairs or replacement of the structural building elements of the property.  If it is in a large structure with multiple tenants the percentages are divided by the total square footage of the building and each lessees rental responsibility.

Although rents are usually lower in triple net leases than other forms of lease agreements, this form of lease agreement is desirable for real estate investors since the expenses incurred by the investor are dramatically decreased due to the transfer of financial responsibilities on the property from the investor/lessor to the lessee.   But they may also have certain tax disadvantages for the lessor also, you will need to seek advice from a Tax professional for more details on how you will or might be affected as a Lessor or Lessee.

The NNN type Leases are frequently used for freestanding buildings, such as outparcel developments or single-tenant “big box” sites, shopping centers, strip malls, etc.

Bondable Lease or Absolute Triple Net Lease (ANNN)
A bondable lease (also called an absolute triple net lease or a “hell-or-high-water lease”) is the most extreme variation of a triple net lease, where the tenant carries every imaginable real estate risk related to the property. Notably, these additional risks include the obligations to rebuild after a casualty, regardless of the adequacy of insurance proceeds, and to pay rent after partial and/or full condemnation. These leases are not terminable by the tenant, nor are rent abatements permissible. The concept is to make the rent absolutely net under all circumstances, equivalent to the obligations of a bond: hence the “hell-or-high water” moniker. An example of this type of lease would be a leaseback arrangement in which a retailer leases back the building it formerly owned and continues to run the business.

Bondable leases are typically used in so-called “credit tenant lease” deals, where the main driver of value is not so much the real estate, but the uninterrupted cash flow from the usually investment-grade rated “credit” tenant.

COMMERCIAL GROSS LEASE:

Gross Lease:
In a gross lease, the tenant pays a flat rental amount and the landlord pays for all property charges regularly incurred by the ownership.  These charges would include but not limited to: Property Tax, Building Insurance, Maintenance of the Building, typically the interior of each unit is the tenants responsibility, other than that everything else is usually included minus utilities. 

You will need to seek the advice of a Real Estate Professional in your area or the advice of a Real Estate Attorney to make sure that you understand the type of Lease and all responibilities you are signing up for!  This is a BIG Commitment, make sure you get the proper advice and explanation of the terms so that you are fully aware what you are getting in to!

KEVIN JONES Real Estate and Loans works in all aspects of Real Estate, Residential, Income and Commercial.  Kevin Jones has experience in Commercial Leasing, he will go as far as following the lease through with re-zoning and Conditional Use Permits (CUP).  Where the World Gym in Monrovia, California, Kevin negotiated that lease from Juniors Tools as a “Retail Store” and after over nine months of massive persistence with the City of Monrovia and many. many City meetings, finally got the  Conditional Use Permit to convert that location to “Health Club Use”.  Kevin Jones will go the extra mile to help you achieve your end result!  If it can be done, Kevin Jones can do it! Call Kevin today!

KEVIN JONES Real Estate & Loans 818-955-SOLD (7653)Kevin Jones California Real Estate Broker
Burbank  818-612-1603  -  Pismo Beach  805-474-7040