that lease is gross!

That Lease is Gross

Lease Terms Are Confusing

•Have you realized everyone seems to have their own definition on lease terminology?

•Have you found it frustrating to compare properties because each one is listed a little differently than the others?

Lighthouse Commercial Real Estate LLC, Madison, WI | www.LighthouseCRE.com | 608.234.4848

http://www.lighthousecre.com/

Master This in Minutes

•This quick and simple presentation will break down some of these terms for you.

•We hope you feel empowered and confident.

•You may feel more ready to pursue your next lease opportunity.



Different Commercial Lease Types

•Full Service Gross

•Gross

•Modified Gross

•NNN

•Absolute Net



The Key to Understanding

•The various lease types are simply different ways to determine who pays the property’s expenses.



What Types of Expenses Are There?

Real Estate Taxes

Building Insurance

Common Area Maintenance (CAM)




•The three expenses just listed are the typical NNN expenses on a property.

•N1: Real Estate Taxes

•N2: Building Insurance

•N3: Common Area Maintenance (CAM)




• In addition to the NNN expenses, there are also expenses for water and sewer, gas and electric, Internet service, phone service, janitorial, and others.



Real Estate Taxes

•This is the amount of real estate taxes a property generates. The municipality in which a property resides determines this amount.

•The amount a Tenant pays is typically prorated using the ratio of leased space to total building size.



Building Insurance

•Building insurance covers the actual building and property and does not include the Tenant’s business property such as furniture, fixtures, and equipment.

•Building insurance is typically prorated using the ratio of leased space to total building size.




•CAM is typically the total cost of maintaining a property over the course of a 1 year period. Snow removal, lawn mowing, and general upkeep expenses often fall into this expense.

•Common Area Maintenance is typically prorated using the ratio of leased space to total building size.




•Be Careful!

• It is very common for people to refer to the NNN expenses as CAM.

•CAM is just ONE of the three NNN.




•CAM expenses are something you will always want to review before signing a lease.•Landlords often put more expenses into CAM than Tenant’s expect.•Staff health care costs, vacation time, benefits, attorney and accounting fees, and many others are often put into this expense and passed through to the Tenant.



So Let’s See if Your Lease is Gross!

•We will break down the main types of leases.

•There are sometimes modifications to any one of these lease types.

•Remember, we are breaking down the expenses and then determining who pays for them.



Full Service Gross

•The Tenant makes one rent check payment to the property owner each month and that is it.

•The Landlord then takes care of paying all of the expenses on the property, including heat, electric, water, sewer, and janitorial.

•This one is easy because you just write one check each month.



Gross

•The Tenant makes one rent check payment to the property owner each month.

• In addition to the rent payment the Tenant often pays for janitorial separately.

•Expenses such as Internet service and other utility needs are also paid for by the Tenant.



Modified Gross

•The modified gross lease fits between a gross lease and a NNN lease.

• In addition to the rent payment, a Landlord may require the Tenant to pay for heat and electric or water and sewer.



Modified Gross

•Sometimes a modified gross lease is called a net, net lease.

• If you hear “net, net” it is likely that one or two of the three NNN expenses are passed through to the Tenant.

•For instance, the Tenant may pay for real estate taxes in addition to rent.



NNN

• In a NNN lease the Tenant pays rent, and in addition pays the three NNN expenses of real estate taxes, building insurance, and CAM.

• In reality, Landlords often write the check to pay these expenses. However, they are passed directly onto the Tenant.



NNN

•NNN expenses are actual costs and not estimates.

• If it snows like crazy, snow removal expenses will go up and they get passed onto the Tenant.

• If it snows less than the year before the expenses will go down



NNN

•Even in a NNN lease, it is typical for the Landlord to still be responsible for structural expenses.

•For example Landlords typically pay for roof replacement, outside wall and foundation expenses, along with parking lot maintenance.



Absolute Net

• In an Absolute Net lease, the Tenant often pays for roof replacement, parking lot maintenance, and all other expenses, including those that a Landlord typically pays for with the other lease types discussed.



Absolute Net

•An example of an Absolute Net lease would be a national pharmacy lease.

•National pharmacies and many other national businesses want to be fully responsible for all maintenance expenses so they can maintain a property to their high standards at all times.



So Why Are There So Many Types?

•Different Landlords and Tenants have different preferences.

•Older buildings are often not separately metered for utilities which makes it difficult to prorate.

•Some buildings have common areas that are difficult to account for.




•The main reason you see NNN leases is because they are very easy to analyze for investment purposes.

•The base rent payment in a NNN lease makes it very easy to determine a property’s Net Operating Income (NOI).




• If you take a property’s NOI and divide that by a CAP Rate, you can quickly determine its value.

•NOI/CAP=Value

•$100,000/.10=$1,000,000.00



What To Watch Out For

•When analyzing space to lease, make sure to clearly define the expenses so that you compare apples to apples.

•A NNN lease may look the least expensive on the surface, but when you add all of the NNN expenses to the base rent, it may be higher than the gross leases at other locations.



What To Watch Out For

•Always ask to see the previous year’s NNN pass through expenses.

•Ask if there are any planned major maintenance expenses like roof replacement or parking lot maintenance that could be passed through after you sign your lease.



What To Do

•Negotiate caps on pass through expenses.

•“NNN expenses may not increase by more than 3% from the previous year,” as an example.

•Redline and remove expenses you find to be ridiculous in the CAM section.

•Properly measure your space to ensure proration accuracy for pass through expenses.



What To Do

•Most importantly, hire a good Broker to look out for your best interests and your best interests alone.

• Identify a Broker who understands your local market and already knows the various Landlords.

•Select someone who is passionate about your success and not simply their commission check.



What To Do

•Remember, negotiation is how you get the very best deal in commercial real estate.

•Every single expense can be an opportunity to save you money.

•Many leases are dozens of pages long and there is plenty of “fine print” throughout.



What To Do

•The ideal time to start the lease review process is 6-12 months before your current lease expires.

•This will provide you the time necessary to canvass the market, identify spaces, negotiate terms, plan for Tenant build out and construction, and finalize a great lease at the ideal location for your business.



Contact Lighthouse CRE

• If you are in the greater Madison, WI area we would love to consult with you.

•At Lighthouse CRE we offer free lease analysis services.

•We provide market canvass reports to show you how your lease compares to the marketplace.




•You can expect to receive a comprehensive analysis from us, along with a strategic plan on how to proceed.

•We are passionate about your success as a business leader and we are eager to help you prosper in the Madison, WI marketplace!




Lighthouse Commercial Real Estate, LLCClient Focused Integrity. Always.


David N. HaugPresident

[email protected]: 608.234.4848

mobile: 608.445.35002916 Marketplace Dr.

Suite 210Madison, WI 53719

Lighthouse Commercial Real Estate, LLC is licensed to practice real estate sales in the State of Wisconsin, United States of America (2015)


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The information provided in this presentation is from personal experiences and is not intended as legal or commercial real estate advice. Some information was obtained from sources we believe to be reliable. However, we do not verify its accuracy and make no guarantee, warranty or representation about it. It is submitted subject to the possibility of errors, omissions, and changes of rules, regulations and laws. We include projections, opinions, assumptions and/or estimates for example only, and they may not represent current or future facts about commercial real estate and the analysis provided. You and your tax and legal advisers should conduct your own investigations into any properties and transactions you have interest in. Only a broker you have agency with can negotiate on your behalf, and only an attorney can practice law on your behalf.

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