by Randall Henderson
Are you wanting to add commercial properties to your property management portfolio? Whether you are an individual property manager or own a property management franchise, expanding into the commercial market is a great way to grow your business.
Vocabulary, Vocabulary, Vocabulary
Commercial management may seem a little intimidating compared to residential but the first step is understanding the vocabulary. Once you have that down, then the rest is easy. My recommendation is to find a commercial property glossary and make that your study guide as you ramp up. The first area to learn is leasing.
Unlike typical residential leasing, there is not a standard commercial real estate lease. While commercial leases can be divided into three general types, it is important to understand that within each of the three types are many options for lease structuring. The benefit of having a variety of lease types is that it allows, through negotiation, the possibility to meet the needs of both the property owner and the tenant. That is another hallmark of commercial management: multiple levers to push and pull creates greater opportunity for negotiation.
Full Service or Gross Lease
In the most general sense, a full service or gross lease is understood to be a leasing agreement in which the owner or property manager is responsible for paying the building’s operating expenses from the rent proceeds. The tenant pays a flat monthly rental rate. Included in that rent are the building operating costs such as property taxes, insurance, utilities, maintenance, etc. If for some reason the inclusion of every expense isn’t reasonable, a modified gross lease can be created where the rent covers most of the expenses but one or more expenses are to be paid by the tenant.
Net Lease
With the net lease the tenant pays a base rent plus a proportionate share of the property expenses such as insurance, property tax, and common area maintenance. With a net lease, the tenant pays a lower base rent for the commercial space, plus some or all of the expenses associated with operations, maintenance, and use. These expenses can include property tax, property insurance, and common area maintenance items. Common area maintenance (CAM) items can include janitorial services, property management fees, sewer, water, trash collection, landscaping, parking lots, fire sprinklers, and any commonly shared area or service.
How a tenant’s proportionate share (or pro rata share) is determined must be explained in the lease. Most often it represents the percentage of a defined area that the tenant is occupying or using.
It is important to mention that there are 3 specific types of net leases.
Single net (N leases): tenant is to pay a basic monthly rent plus a proportionate share of property taxes. The property owner pays CAM and property insurance.
Double net (NN leases):tenant is to pay a basic monthly rent plus a proportionate share of property taxes and property insurance. The property owner pays CAM.
Triple net (NNN leases): tenant is to pay a basic monthly rent plus a proportionate share of property taxes, property insurance, and CAM.
Percentage Lease
A percentage lease is a lease structure most frequently used with retail properties. The way that this type of lease functions is that the tenant pays a base rent rate plus a percentage of their gross sales made on the premises. Typically there will be a threshold amount of gross sales and the percentage rate will be charged on the gross sales above that amount.
Know Your Stuff!
Being able to negotiate leases is one of the keys to success in commercial management. Because leases run on average much longer than residential, the negotiation process before the lease begins becomes crucial. Knowing your vocabulary and understanding the details can be the difference in your success. You can do it!
