The Lease Agreement
One of the most important aspects of leasing a new property is the functionality of the building. Will it allow efficient operation of your business? Is there ample office space? Is the power distribution adequate? Is vehicle access and parking sufficient? These are common questions asked but equally important can be the lease agreement itself. Here are some questions that should be answered before making an informed business decision.
Types of Leases:
There are basically two types, Net and Gross.
Commonly referred to as NNN, 3N, Net Net Net or Triple Net, lessee (tenant) is responsible for, in addition to rent, all operating expenses such as property taxes, insurance and maintenance.
Lessor (landlord) pays all expenses of ownership, such as taxes, assessments and insurance. Many lessees believe that the rent covers all the expenses under a Gross lease but this is usually incorrect. Most Gross leases have provisions that pass along many expenses to the lessee. Some of these charges may be termed CAM (common area maintenance) charges, such as landscaping, trash disposal, water, gas, electric, repairs and maintenance. In addition, increases in property taxes and insurance can also be the lessee's responsibility. Many times lessors will charge a monthly CAM fee but this may only be an installment with the lessee responsible to make up any shortfall annually. Even if the lessor waives all additional charges, the lessee will usually be responsible to pay for all maintenance inside their unit including the mechanical equipment and associated systems.
A variation of both Net and Gross leases. More commonly used for retail operations, a percentage lease requires the lessee to pay not only a base rental amount but also a percentage of their gross business income.
Other considerations are annual rental increases. Many leases have annual CPI (consumer price index) rent adjustments. These adjustments may have guaranteed minimum and maximum increases, or in some cases may be predetermined fixed rate increase.
Does the lease have an extension option? This is a clause that allows the lessee to extend the term of the lease at the expiration of the current term. Without this clause a lessor has no obligation to re-lease the premises to the current lessee and the lessee may be forced to vacate whether they want or not.
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