How to lease your property to tenants
Different kinds of leases in real estate investments
You have probably heard the terms: Net Lease, Double Net Lease, and Triple Net Lease. This type of lease is usually used in the leasing of stores, offices or industrial buildings.
There has been some discussion that there is no such thing as double and triple net leases. A lease is either a "net" lease or it isn't a net lease. Since most investors still use the first concept, we will discuss what each type of "net" lease means.
Net Lease infers that the tenant (lessee) pays all real estate taxes and the landlord (lessor) pays all other expenses.
Double Net Leases infer that the lessee pays all taxes and property insurance and the lessor pays all other expenses.
Triple Net Leases state that the tenant pays everything, taxes, insurance, repairs and maintenance, etc. The lessor pays only the mortgage payments on the property.
Obviously, a property with a triple A tenant leasing on a Triple Net Lease basis makes an excellent management free investment. There are also difficult to find.
There are a limit less variety of clauses that can be written into a lease to clarfiy the responsibilities of both the lessee and the lessor. Some business leases may have forty to fifty clauses written into them.
It is common to write commercial leases, especially in shopping centers where major tenants are involved, on a percentage basis. The tenant pays a base rent, usually less that the current market rent. He also agrees to pay a percentage of his gross income, over a pre-determined minimum, as additional rent. Here is how a percentage lease might work.
ABC Chain Store leases 25,000 square feet of store space at a base rent of $2.00 a square foot. This amounts to $50,000 a year base rent. They also agree to pay 2 percent of their gross sales over $2,500,000 as additional rent. (Two percent of the first $ 2,500,000 is $50,000 which represents their base rent.)
Assume ABC Chain Store has a gross volum of $3,000,000 for the year. They owe an added rent of 2 percent of the $500,000 over the $2,500,000, or $10,00. Their total rent for the year will be $60,000. There will often be a maximum limit written into the lease.
Percentage leases can also assist a new tenant in the center. By offering him a percentage lease, he will be able to pay a lower initial rent, giving him time to build up the dollar volume of his business before being faced with major rent costs. If the tenant does become successful, the landlord could end up with an even higher rent than if he had been locked into a base rent only. It also helps him get vacant space leased up and at least bring in some income to help offset operating expenses.
Leases will often allow the tenant to sub-lease all or part of his rental space. In the case of an apartment, it would restrict the tenant to leasing the entire apartment, not taking in a boarder. Sub-leasing is done with the consent of the owner or lessor.Most lease spell out that this consent cannot be unreasonable withheld.
Commercial lessees often sub-lease aportion of their space in order to help offset their rent costs. Perhaps they had to take more space than they needed or perhaps they wanted extra space available for planned expansion. The sub-lease should not be for a term in excess of the primary lease, without the consent of the lessor.
A simple rental apartment lease requires only a pre-printed form lease. This type of lease is very adequate for most rental situations. Once you have established your rental standards and are prepared with a lease, you are ready to locate a tenant.