Leasing 101

Lease Types:

  • NNN (Triple Net) Lease – Tenants pay base rent and also reimburse landlord for property taxes, common area and building exterior insurance, as well as costs of common area maintenance. Landlords are typically responsible for the costs of repairing building structure (roof, foundation, and exterior walls). Tenants are responsible for all maintenance, repairs and insurance for the interior of their spaces.
  • Absolute Net Lease – Landlord receives the agreed upon (base) rent. Tenant pays all taxes, insurance, expenses for the building maintenance and repairs, including repairs to the structure. These leases are also called “Zero Landlord Responsibility”, and are popular with single-tenant buildings. Gross Leases – Landlord receives the agreed upon rent amount, which includes all expenses for the building. Utilities may or may not be included.
  • Modified Gross Lease – The agreed upon monthly rental payments include building expenses for the year the lease was signed in, which is established as the Base Year. Thereafter, tenants reimburse landlord for the increase in such expenses above the Base Year. Utilities may or may not be included.
  • Ground Lease – Tenant leases the land, builds its own building on it, pays rent for such land only to the landlord. Tenant also pays all building expenses, insurance and property taxes. The building becomes the property of the landlord once the ground lease expires or is terminated early.
  • Percentage Lease – Tenant pays a percentage of its sales instead of / or /in addition to scheduled base rental payments. Additionally, tenant may be required to pay property taxes, insurance, and building maintenance/repair expenses.

Base Rent (aka Minimum Guaranteed Rent) – this is the actual rental rate that is negotiated and agreed upon in the lease agreement, which can stay the same or increase over years.

However, you always know what it is or will be because it is spelled out in your lease agreement. It is usually quoted a $Dollar amount Per Sq Ft per Year. To calculated your monthly base rent, simply multiply this amount by the size of your space in square feet and divide by 12 months.

For example: Quoted rate x Size / 12 months = $30 Per SF/Yr x 1,300 Square Feet / 12 months = $3,250 /month.

NNNs (aka Triple Nets / aka pro rata share of CAM, Insurance and Taxes) – this amount is paid in addition to the Base Rent to cover Common Area Maintenance (CAM); property and liability insurance covering the exterior of the building and common areas, and property taxes.

– While Base Rent is determined and set for the lease term ahead, the NNN amount is an estimate and may change overtime. Neither landlord nor tenant can foresee the changes in the tax  or insurance rates, or the costs of maintenance. Some maintenance costs (trash removal, sweeping and landscaping) can be controlled to an extent.

– Just like Base Rent, it is usually quoted as a Dollar $ amount Per Sq Ft per Year. To calculat your monthly NNN payment, simply multiply this amount by the size of your space and divide by 12 months.

For example:  Quoted rate ($) x Size(Sq Ft) / 12 months = $8 Per SF/Yr  x 1,300 Square Feet  /  12 months = $866.67 /month

Reconciliation of NNNs – the quoted rate for NNNs is an estimate ahead. After the calendar year is done, Landlord recalculates the actual expenses for the year and determines if tenants overpaid or underpaid. If tenants overpaid for NNN (the estimate was too high), they will receive a refund or credit toward their base or future NNN rent. If tenants underpaid, landlord will issue invoices for the underpaid balance. Watch out for the landlords quoting low estimated NNN, because you will get a high reconciled bill after the year ends.

Initial Term – number of years you are signing the lease for and committing to.

Renewal Term (aka Renewal Option / aka optional term) – an additional term granted to tenant by landlord, which tenant does not need to commit to. It is optional, and tenant may choose to use it or not later.

Premises – the same as your space, that only you will occupy.

Common Area – the parking lot, landscaped areas, sidewalks, driveways and other areas used by customers and all tenants

Tenant Improvement Allowance (aka TI money / aka Build-out allowance / aka build out credit) – a one-time payment from landlord to tenant to cover some of the construction costs, usually given for spaces never occupied before and after tenant opens for business. This means, that tenant needs to advance money to over the construction costs with tenant’s own money first.

Delivery Condition – condition of the space Landlord will lease the space in.

  • Grey Shell condition of the space that has never been buildout or occupied before. It has no HVAC, bathroom, distributed electric lines or panel inside.
  • Vanilla shell (a.k.a white shell/ a.k.a white box) – basic finish of the space, which includes 1 bathroom, walls primed and ready for paint, leveled concrete floor ready to receive carpeting/flooring; HVAC system, white drop ceiling and basic electric package
  • AS IS – the way you see it right now
  • Broom Clean – all rubbish removed
  • 1st generation – means the space has not been previously occupied
  • 2nd generation – means the space was previously occupied