What Kind of Law Firm Do I Need?

A commercial real estate law firm has a very particular area of practice. A law firm that dedicates the bulk of its practice to real estate will have more focus and experience than a law firm that lists commercial real estate as one bullet point among many. Look for keywords that match your issue: landlord-tenant dispute, land acquisition, lease negotiation, etc.

A smaller firm will generally be more affordable than a larger firm. Larger firms have more resources, including employees, but they have to support those resources with higher costs. This is a reason why hiring lawyers can seem unaffordable to the general public. However, smaller firms often have more flexibility on their fees and more affordable costs for an average small business. Commercial real estate law firms that focus on small businesses, start-ups, real estate investors or other similar niches will probably have more affordable rates. They will also have more familiarity with the common issues and challenges facing this audience and will be more prepared to help.

How Do I Find A Law Firm I Can Afford?

The Internet is a great resource here. There are lots of sites online where you can find a law firm that can help you. The local chamber of commerce or a lawyer referral service will probably offer free referrals or access to their directories. Your own business and personal network could be a great resource to find an attorney as well.

I Can’t Afford a Commercial Real Estate Law Firm

Affordable doesn’t mean cheap. You’re paying for a customized, tailored legal solution and legal knowledge. Real estate brokers and Google can’t do that. If you don’t invest in a commercial real estate law firm at the beginning of the transaction, when there’s time to understand and evaluate the consequences of the transaction, you will pay the price. The opposition will have knowledgeable legal counsel that will protect them and advocate for their interests. If you don’t get help at the beginning, you will need a lot more help to navigate the legal and financial consequences of the poor deal you are trapped in.

Call several law firms and ask for a fee quote based on the transaction. Have all of the transaction information ready so you can answer the questions to get an appropriate quote. Be candid with the law firm. They may have some creative solutions regarding the fee.

If you feel you can’t afford a commercial real estate law firm to assist in your transaction and you’ve gotten fee quotes from several of them, then you are probably not ready for the transaction. Commercial real estate is an investment transaction, whether you are buying, selling, or leasing, and the transaction needs to be capitalized properly. Your commercial real estate attorney will require an investment up front, but you will reap the benefits in a properly negotiated transaction where you understand your legal and financial rights and obligations. 

Jenna Zebrowski focuses on affordable, tailored legal real estate solutions. Reach out today to set up a consultation or to receive a no-obligation fee quote.

Disclaimer
The transmission and receipt of information contained on this website does not constitute an attorney-client relationship. Persons should not act upon information found on this website without first seeking professional legal counsel.

Commercial sublease obligations can make or break your company financially. When subleasing a commercial space, the sublessee is motivated to reduce expenses, so the rent price can be attractive, but the sublessee will probably make some business concessions, including being bound by the original lease that may not have been negotiated properly or reviewed by an attorney. When negotiating a sublease, there are some important questions to ask. 

Q: Does the landlord need to consent to sublease?

A: The answer is almost always yes, but refer to the original lease agreement confirm.  Get the landlord’s consent in writing! 

Q: What is the landlord’s ability to terminate the lease or kick out the sublessor out of the space if the sublessee defaults?

A: It should be in the master lease, but a sublesse can modify these rights in the sublease, with everyone’s agreement. Negotiate so that the defaulting party is responsible for the costs and any damages incurred because of a default or eviction. 

Q: What is covered in the use clause

A: There may be restrictions on business terms, or what the space can be used for.  Make sure the landlord waives any of these restrictions that apply to sublessee’s business before signing the sublease!  Think about anything that is specific to your particular business, such as 24-hour access to and use of your space, parking access, delivery times and climate control.

Q: Why does the sublessor need to provide financials? 

A: When subleasing, the sublessee is essentially taking over the commercial real estate lease from the sublessor. The sublessor is usually required to prove to the landlord that the sublessee is a good business risk, because they are taking on the financial responsibility for the lease.  A traditional way to prove this is for the sublessee to provide financial information to the landlord to demonstrate that he or she can afford the rent.

Q: What about the section on attornment, right to cure and right to notice

A: Attornment means that if there is a new landlord, because the building ownership is transferred, then the sublessor and sublessee will agree to treat the new landlord like the old one, including paying rent. 

If the sublessor or sublessee does something wrong, whether it be monetary, such as not paying rent, or non-monetary, such as not fixing something, the right to cure comes into play. They defaulting party should receive legal notice about the issue and then be given a chance to fix the issue – the right to cure. 

How the landlord will tell the sublessee that something is wrong is typically described near the end of the lease. This is known as the right to notice.

The sublease might be a shorter document, but it’s important that it is drafted properly, or the sublessee might lose valuable legal rights upon signature. It doesn’t matter what’s fair, it matters what is in the lease. A smart sublessee will make sure that all of the documents that are needed (it might be more than one!) to make the sublease legal are reviewed by a knowledgeable commercial real estate attorney. Give me a call to set up an appointment today to discuss your sublease concerns!

Disclaimer
The transmission and receipt of information contained on this website does not constitute an attorney-client relationship. Persons should not act upon information found on this website without first seeking professional legal counsel.

An office lease agreement is a contract between the landlord and tenant to rent space. The tenant pays the rent and uses the space to conduct business ,and benefits because there is no capital expenditure to purchase the property. The landlord benefits because there is a steady stream of income.

About the Office Lease Agreement

A standard multi-tenant office lease agreement will either be a triple net (NNN) lease or a gross (all -inclusive) lease. If there are lots of smaller tenants in the office building and there is only one rental payment, it’s probably a gross lease

All of the operating costs of the building, like taxes, insurance, and common area costs, are included in the rental payment. If there are additional payments beyond rent and utilities, it’s probably a triple net lease. The tenant will pay its proportionate share of the costs of operating and maintaining the property in addition to the lease cost.

The office lease agreement draft is usually provided by the landlord and contains language that favors the landlord. It may be a standard office lease agreement or a boilerplate contract, but it still needs to be read and understood. It’s important that all of the negotiated changes are in the document and that the tenant understands what he/she is agreeing to. 

The landlord may state that the lease contains common or standard language, but that doesn’t mean the tenant has to accept it as-is. The landlord has a team representing his/her interests, so the tenant should have a team in place, too. A good commercial real estate attorney with experience can read the lease document and make sure the negotiated items are there, that you are protected both financially and legally, and that you understand the rights and obligations you are taking on when you sign the lease.

Single-Tenant vs. Multi-Tenant Locations

One thing to consider is if there are many tenants in the building or just one. If the tenant is the only occupant, then there is only one source of income for the landlord. The landlord will want to protect against the tenant’s default because mortgage, tax and insurance obligations don’t go away just because the building is vacant. 

A multi-tenant building means the risk is spread out, so there’s a diversification of income sources. The landlord might be willing to make concessions about the creditworthiness of the tenant, but that will probably mean a higher rental rate for the tenant.

You’ve got your team in place and they’ve got your best interest at heart. Your commercial real estate attorney should understand the tenant’s side and have experience dealing with the landlord, meaning they know what to push on and how to get the best deal without tanking the deal. Your attorney should also economize on legal fees and protect the relationship, too.

Getting a Good Office Lease Agreement

It can seem like there’s a lot of lease document for a simple office transaction. A simple transaction usually doesn’t mean a short lease, however!  Your commercial real estate attorney will help you understand the risk, rights and responsibilities of each party, and negotiate to protect your interests.

Disclaimer
The transmission and receipt of information contained on this website does not constitute an attorney-client relationship. Persons should not act upon information found on this website without first seeking professional legal counsel.

  1. General Exclusions

The tenant needs to understand what he or she is paying for to ensure that he/she is not being overcharged by a landlord who is trying to turn operating expenses into a profit center. Landlords might put language into the lease allowing for: 

  • Charging the cost of capital expenses and improvements when they occur
  • Including charges specific to one tenant through to all tenants
  • Charging a management fee or administrative fee (or both!) that are not market rate

Here are some areas where a reasonable landlord will negotiate in a commercial real estate lease:

  • Leasing commissions, legal fees, promotional costs, etc.
  • Charges relating to sewer or water connections
  • Entertainment or travel expenses
  • Cost of repairs, replacements, etc. covered by insurance
  • The cost of any alterations or improvements due to construction defects or compliance reasons
  • Repairs due to condemnation or casualty
  • Costs related to lease negotiations or disputes
  • Correcting a tenant violation of a lease
  • Depreciation 
  • Costs of renovating, redecorating or improving a space
  • Amounts paid to landlord-related parties for services that are above the market rate
  • Salaries of landlord employees that are mangers
  • Landlord’s general overhead and administrative expenses
  • New or additional structures
  • Capital expenses
  • Income, excess profits, franchise, transfer, estate or inheritance taxes 
  1. Capital Expenditures

Capital expenses are not capital improvements.  A new roof or air conditioner are not repair or maintenance items, but are capital improvements that benefit the project. These capital expenses often have a useful life beyond a tenant’s commercial lease term. Landlords like them because they are needed and it may increase operating expenses on a go-forward basis. Tenants don’t want to pay for more than their share of these expenses. A typical example is a replacement HVAC unit

The best way to resolve this is to compromise.  The tenant will pay for capital expenditures that reduce overall operating expenses, but those costs are amortized over the useful life of the improvement. 

  1. Management Fees

Another potentially expensive section is the issue of the management fee for the project. Landlords may hire an affiliated party to manage the property. There’s no guarantee that the rate being paid to the property manager is market rate, or that the landlord isn’t padding operating expenses and keeping the difference.

There are a couple of different ways to address this.  One solution is to specifically state that whoever the landlord hires as the property management company, that entity will not be paid more than the market rate.  Another solution is to simply to cap the cost of the management fee, usually as a percentage of the gross rent for the building. 

 

NEGOTIATION TIP: Watch out for a commercial real estate lease that charges an administrative fee AND a management fee!  It doesn’t matter how it’s calculated, it’s usually a landlord attempt to collect twice on the same charge. A good commercial real estate attorney can help the tenant negotiate to control this cost.

 

  1. Controllable Operating Expenses

Finally, another way to avoid overcharging for operating expenses is to cap the increase for “controllable” operating expenses. Controllable expenses typically excluded insurance, real estate taxes, and specific other items that are beyond the landlord’s control.

How do you know what other controllable expenses are?  Need help understanding the different fees and how to negotiate them?  Hire a commercial real estate attorney, who knows what to look for and will advocate for your best interests.

Disclaimer
The transmission and receipt of information contained on this website does not constitute an attorney-client relationship. Persons should not act upon information found on this website without first seeking professional legal counsel.

A commercial building lease agreement formalizes the leasing relationship between a landlord and a tenant to rent business property in order to conduct business operations thereon. When operating a business, a formal legal agreement that recognizes and codifies the relationship between the landlord and tenant is necessary and will prevent confusion and unnecessary costs at a later time. 

In commercial real estate, a building lease is used for business purposes, not residential. The premises is the location the tenant is leasing. If the premises part of a larger building or project, and there are additional tenants in the building, then there are additional rights to consider. Everyone in the building will need to have access to common areas and parking lots, for example. 

The tenants will typically sign a triple net lease form which will include information about maintaining the common areas. If the tenant’s business has explicit needs such as climate control or special delivery times, these restrictions will also need to be negotiated and specified in the building lease agreement. 

When creating or signing the commercial real estate lease, these items should be explicitly stated:

  • Who is the landlord
  • Who is the tenant
  • Term (the amount of time the tenant will possess the premises)
  • Start and end dates
  • Automatic renewal

A commercial real estate lease tries to anticipate problems and address them before they happen. The tenant and the landlord will know who is responsible for what, and the associated costs.  It’s important to be aware of what is in the building lease. What’s even more important is what might be left out of the lease, so it’s important to know what to look for before you sign.

A prepared tenant will ask these questions and make sure the building lease answers them:

  • Who pays for utilities?
  • Who handles maintenance and repairs?
  • Who pays for substantial or partial damage to the premises? 
  • How are disputes resolved between landlord and tenant? Between tenants? 
  • What’s the jurisdiction and laws governing the resolution to the dispute?
  • How are problems handled? Arbitration, mediation (ADR) or in court?
  • When can the landlord enter and inspect the premises? When can other people enter?

When you’re working with your commercial real estate attorney to negotiate your building lease, you want as much clarity as possible regarding the obligations and liabilities of each part; who has to do what, and who has to pay for what? A savvy tenant will understand the rights and responsibilities of each party to the building agreement, and will make sure that the building lease gives the tenant the ability to enter the space and operate the business.

 

An important thing to note is that a lease agreement triumphs over default laws. It’s vital to ensure your signed lease goes into great detail to protect you. If it’s not in writing, it doesn’t exist. If the landlord breaks a promise (accidentally or deliberately) or simply changes his/her mind, your lease will enforce your agreement.  

If you want to make sure your building lease has all of the rights and responsibilities, obligations and liabilities set forth, then make sure you get an experienced commercial real estate attorney to review your lease before you sign it.  Schedule a time to speak with me today to protect yourself!

Disclaimer
The transmission and receipt of information contained on this website does not constitute an attorney-client relationship. Persons should not act upon information found on this website without first seeking professional legal counsel.

The relationship between online traffic and physical locations is still being understood, but data suggests the relationship is not mutually exclusive, but rather mutually beneficial. A 2017 study found that for each dollar that is generated in online sales from reviews, another $4 to $6 is generated in sales at a brick-and-mortar counterpart. This reveals a significant motivator for online sales: information and transparency. Consumers will spend days, weeks or even months researching a product, and will often opt to purchase the item in-store. Web-based sales channels are not taking retail sales from brick-and-mortar locations; the information they provide online is driving new sales to the brick-and-mortar counterparts. Savvy retailers with a knack for creating an inviting destination for consumers can see a positive future for retail.

Its online web traffic essentially acts as a funnel to the physical location and translates into sales of over $3,000 per square foot, according to one analysis. That is higher than even Tiffany’s. Today’s retailers use the information they gather about their customers to make more informed real estate decisions.

Landlords are more open to on-line concepts, investors are slower to follow, and prefer national names on rent roll; smaller retailers sometimes outperform national competitors.

National concepts are notoriously difficult to work with, especially those with low margins. Some use their collective set of negative landlord experiences to push for tenant-friendly leases. Landlords have, in the past, given up key negotiating points because the increased value with a national tenant offset most negatives or financial loss. Online-only retailers opening their first locations do not have the experiences with landlords, economic downturns and so on to know what to push for, nor do they provide owners with the same increase in value to the property. On the other hand, this is a reason why many investors, tired of being pushed around by major tenants, are inviting new players to the table, and why we are seeing local tenants obtain locations that historically they would not have been presented with.

Consumers are spending their time researching online but walking into stores in search of an experience. The data collected from consumers online can be used to create exactly what shoppers are looking for and retailers must be prepared to meet that need.


Disclaimer:

This article does not create an attorney-client relationship. This article is for general education purposes only and is not legal advice. You should consult with a qualified attorney before you rely on this information.

What’s Important Financially in a Building Lease Agreement?

When negotiating a building lease agreement, whether it is a retail, office, industrial or another type of commercial real estate, the Landlord will usually provide the first draft of the lease agreement.  It’s probably Landlord’s standard lease document, but the terms of a building lease agreement can (and should) be negotiated.

Landlord’s lease agreement is a draft, a first offer.  An experienced, ethical Landlord will expect some changes and negotiation to the document.  The document should evolve from a landlord-drafted standard lease form to a customized, negotiated document that is a mutual agreement between both of the parties.

Rent may not be the only charge Tenant pays to Landlord. Tenant should understand what legal and financial obligations it is taking on by signing on the dotted line. The best time to negotiate and to ask questions and to clarify obligations is before the lease is signed and legally binding.  When Tenant reviewing the building lease agreement, here are a few financial items to look for and negotiate:

Additional Charges

  • Utilities- billed directly to Tenant or Landlord will bill Tenant for its share, or some combination thereof.
  • Percentage Rent- if Tenant sell a certain amount of product (usually not services) from the location, Tenant pays a percentage of those sales to Landlord. This is most common in a retail situation.
  • Penalties- late fees or interest charges if payments aren’t made on time.
  • Maintenance contracts- Tenant may be required to pay for inspections or maintenance on the HVAC (heating, ventilation, air conditioning) or other systems
  • Construction costs- who pays for what, including construction related to the Americans with Disabilities Act of 1996 (ADA)

 

Security Deposit

  • The total amount of the security deposit
  • How it can be used- damages, late rent, for late fees and penalties, etc.
  • How do you get it back at the end of the lease? Negotiation tip: put a time limit on when the security deposit, or balance, is returned to Tenant.
  • If the security deposit is used, is there a replenishment requirement?
  • The rent may increase during the term- it could apply to the security deposit as well.

NNN (Triple Net Expenses)

  • Taxes- tax due on the real and personal property
  • Insurance- Tenant should carry its own and may contribute to Landlord’s cost as well if there is a common area
  • CAM/OpEx- common area maintenance or operation expenses are contributions to make sure the areas everyone shares are maintained.

 

Contingent Expenses

  • If the space becomes too big, too small, or too expensive, Tenant might have the ability to sublease or assign all or part of the space. Landlord may charge a review fee or may require Tenant to guarantee the remainder of the building lease agreement term.
  • Tenant could negotiate a buyout or early termination right, but there’s usually a financial penalty attached.
  • If Tenant defaults, and Landlord cures the default at its own expense, determine what charges Landlord can collect. Negotiation tip: Landlord might accelerate damages to get them all at once, instead of waiting as they come due.  Watch out for the present-day cash value!

 

The building lease agreement is an expensive obligation, and Tenant should be prepared, legally and fiscally, before signing the lease document.  It’s important for Tenant to have a team in place, and to make sure to review and understand its financial obligations under the building lease agreement.


Disclaimer:

This article does not create an attorney-client relationship. This article is for general education purposes only and is not legal advice. You should consult with a qualified attorney before you rely on this information.

The commercial real lease should be customized to each Landlord-Tenant relationship through negotiations. The investment in commercial real estate should reflect the risk appetite and investment requirements of the investors. How do you know if it’s a good investment, based on your standards?  Commercial real estate investing should be a very tailored, customized to the investor, and the legal, regulatory landscape, as well as the economic marketplace, can affect the investment decisions. Certain information is required to be disclosed, and it’s done under GAAP standards in the United States. GAAP means Generally Accepted Accounting Principles.

 

How Do I Know If the Lease is a Good Investment?

 

Until December 2019, private companies can categorize a lease as a capital lease or an operating lease.  A capital lease is reported on the balance sheet, and an operating lease is in the footnotes.  This reporting loophole has been around about 40 years, and the powers that be have decided it needs to change, since it contributed (among other factors) to the Dark Times CRE endured during the early 2000s.

 

Investors didn’t have the information they needed to make truly good investment decisions regarding commercial real estate.  So they sometimes made bad ones, and that brings us to where we are today, and the need to close this loophole.

 

What Difference Does It Make to an Investor?

 

The updated standards now provide for financing (not capital) lease and operating leases.  Finance leases are treated pretty much like capital leases, though, and it all goes on the balance sheet, so all of the information is there.  But it costs time and effort to track all of this and account for it on the income statement, and, of course, it affects the amount of available cash on hand. Here’s the trick: if you lease is 12 months or less, it can be an operating lease and go in the footnotes.  Otherwise, it’s on the balance sheets.  You want to keep that lease expense in the footnotes and off the balance sheets, it’s gotta be no more than 365 days for the term.

 

Tenant Flexibility

Short term leases are hip, trendy, and oh-so-in. Tenants like the ability to sign up for a lease that’s as agile and nimble as they are.  Plus, short-term commercial real estate leases are usually gross leases.  The rent payment is a premium price, but it’s a predictable.  There are no pass-through expenses that fluctuate and are beyond the control of the Tenant, even though the Tenant has to pay for some or all of them. Co-working, shared space and pop-shops with curated, ever-changing content are really focused on these short-term “novelty” leases.

 

Now there’s even more incentive to have a short-term lease; it’s advantageous to the balance sheet reporting requirements, and the Tenant can leave if Landlord won’t negotiate a reasonable lease amount and incentivize Tenant to remain and renew.

 

Landlord Uncertainty

Landlords only have rent income to cover their expenses, including building maintenance and attracting and keeping Tenants. Instead of passing through the additional expenses to Tenant, and keeping rent as income, and doing this for years, Tenants are looking for competitive rental rates. Landlord has to budget, plan, and forecast carefully to keep gross rent rates at a competitive amount in the market but enough to cover the operating expenses.  Shorter-term leases mean higher expenses, as Landlord has to recoup the expenses over a less-predictable lease duration, and higher potential turnover means higher potential costs, such as advertising and marketing the now-vacant space.  The long-term capital expenses and building improvements, which need to take place, won’t be predictably recaptured, because the tenant might not stick around.

 

The entire valuation model for a commercial building could be altered as a result. The gross lease means rent payments are going up, which further encourages shorter-term leases for tenants, who can move at the end of the term to a less-expensive space, or the Landlord has to offer financial inducements to keep Tenant in place after the expiration of the year lease ,OR there will have to be some sort of financial break for Tenantto take the hit to the balance sheet to stay in a longer-term lease.

 

The Landlord has less certainty.  An absolute triple net lease is now more expensive to Tenant, which means less money to pay in rent to Landlord, especially when the NNN expenses, are high.


Disclaimer:

This article does not create an attorney-client relationship. This article is for general education purposes only and is not legal advice. You should consult with a qualified attorney before you rely on this information.

commercial real estate leasing, commercial real estate lawyer, lease, firm, office

Do you need a commercial real estate lawyer for your lease transaction?

Choosing your commercial real estate lawyer before the transaction is the key to success.

Choosing the right commercial real estate lawyer for your transaction involves a lot of factors. A wise client will ask about the lawyer’s commercial real estate transaction experience and the costs of the lawyer’s services. This should be done BEFORE the commercial real estate lease contract has been signed. The time to negotiate and ask questions about the commercial lease terms and agreement is before you sign!

Commercial Real Estate Transaction Experience

The commercial real estate lawyer should have lots of experience and focus on your particular business space, so he or she can advocate for you and protect your interests. The lawyer needs to be familiar with the type of property (the “asset”) class and the client base. A retail client will have different needs than someone purchasing raw land or leasing an office or industrial space.

Ask what kind of experience the attorney has in reviewing and drafting documentation, like commercial office leases or triple net leases. Find out what percentage of their practice is commercial real estate leasing. You don’t want someone who lists this as one bullet point among many- commercial real estate is complex and evolving, and a general practice law firm won’t have the experience necessary to negotiate in your best interest.

How many commercial real estate leases has the attorney negotiated? You want someone with enough experience to make sure you’re not leaving anything on the table at negotiation, and who can give you an unbiased view of the deal. The deal must be evaluated for risk appetite from a financial and legal perspective.

Commercial Real Estate Lawyer Costs

Contact your commercial real estate lawyer BEFORE you sign!!

Don’t try to save money by using a family or friend’s lawyer or Google to help you negotiate your lease. The intricacies of commercial real estate leasing and negotiations are not taught in law school. Only a commercial real estate lawyer, practice and experience, will be advocate for your interests. A web search will not substitute for a lack of knowledge. Commercial real estate is a complex and expensive transaction, and it’s worth it to invest in a knowledgeable lawyer.

Hopefully, the commercial lease transaction goes smoothly. The real estate lawyer will be working behind the scenes with Landlord’s representatives and brokers to secure your legal assets and your peace of mind. A real estate broker can’t provide legal advice, and the more complex the deal, the more legal items there will be. The broker is only paid if the transaction is completed, but the commercial real estate lawyer will advocate for your interests first.

Your Commercial Lease Transaction Is Unique

The commercial lease agreement is Landlord’s first offer, not an agreement uniquely tailored to your specific business. The commercial lease terms need to reflect the exact agreement between the Landlord and the Tenant. A good commercial real estate lawyer will take you through the lease document and explain the risk and reward of the negotiated lease agreement to you.

This article does not create an attorney-client relationship. This article is for general education purposes only and is not legal advice. You should consult with a qualified attorney before you rely on this information.

Is a Triple Net Lease Agreement Right for You?

Understanding the difference between a triple net lease agreement and other types of lease agreements.

A triple net lease agreement (it could be written as net-net-net, or NNN, lease agreement) is a common commercial real estate lease structure. A “net” is term for “expense” and the “triple” part defines the three most common shared commercial real estate expenses: real estate taxes, insurance, and operating expenses.

In pretty much any lease situation, Tenant will pay its rent, the cost of the utilities it uses, and taxes on its personal property. The rest should be negotiated, depending on the type of lease agreement.

Absolute Triple Net Lease

Just because it’s called a triple net lease, doesn’t mean it actually is one. In an absolute triple net lease, the Tenant is responsible for all of the NNN expenses. This is more traditional in a ground lease situation, or if Tenant is exclusively occupying the entire premises. In a shopping center or large office building, it’s more likely that Tenant will pay a portion of the NNN expenses, along with all of the other tenants. Negotiation Tip: Watch out for repairs and replacement, especially structural ones and who is responsible for them.

Proportionate Share Triple Net Lease

In this lease triple net lease agreement structure, Tenant should pay its Proportionate Share of real estate taxes, Landlord’s insurance, and common area expenses (or operating expenses). If the lease isn’t negotiated properly, then Tenant is likely paying more than its fair share. The Landlord is responsible for the making sure the payments are made for the real estate taxes and its insurance on the property containing the building, using the funds collected from Tenant and other building occupants. Landlord should also maintain and repair the building and the property, so that it’s safe for everyone to use. Check out my post on Tenant’s Proportionate Share to learn more.

Gross or Full Service Lease

This is pretty popular in an executive suite or co-working situation. All of the expenses (real estate taxes, Landlord’s insurance, operating expenses, even utilities) are rolled into the cost of the rent. Tenant pays one amount every month to Landlord, and Landlord pays all of the bills. Tenant will probably pay a premium rent for the convenience of this arrangement, but it’s a good situation for an all-included arrangement.

Percentage Lease

Tenant will pay the non-rent charges per the agreement (absolute NNN or Tenant’s Proportionate Share), and will report its sales to Landlord, usually on a monthly basis. Tenant will then pay a percentage of the money it collects on its sales to Landlord as additional rent, with an artificial or a natural breakpoint.

  • Artificial Breakpoint: A stated dollar amount (example: 5% of all sales).
  • Natural Breakpoint: divide base rent by the percentage (example: 5% of sales over $50,000). A natural breakpoint means that the Landlord should receive its percentage rent only if there enough sales to pay the minimum rent.

Percentage rent can be part of a triple net lease agreement or a full-service lease agreement. Landlords like this arrangement for retail or restaurant tenants, but it’s not as typical for a service-oriented Tenant. Negotiation tip: Define sales as merchandise that is bought and paid for at the location, and exclude online sales with in-store fulfillment and services.

This article does not create an attorney-client relationship. This article is for general education purposes only and is not legal advice. You should consult with a qualified attorney before you rely on this information.