In commercial real estate, it’s important for investors to understand the structure of a lease and provisions included. Lease structure greatly impacts property value whether you are selling or purchasing a commercial real estate.
On the other hand, tenant or lessee can negotiate the best lease terms in lieu of long term commitment backed by the corporate or personal guaranty. Such a lease allows the tenant to do future business planning, run cost effecting operation and build a loyal customer base.
The key factors that you need to consider a lease structure:
Base terms and option
Longer the base terms, the higher the property value. When structuring options, whether for 25 years, 15 years, 10 years, or 5 years, breaking down option into reasonable periods is more attractive than one long term, or too many short term options. For example, ‘2 five-year options’ is more desirable than ‘10 one-year options’ or ‘one 10 year option’. Make sure to look at both the base terms as well as the options structure.
Rent bumps and income growth
A fixed rent structure is preferred over rent bumps that are tied to CPI or market value. You can choose from some common terms like 10% increase every five years, 7.5% increase every five years, or even 2% increase annually.
Lease Structures and Landlord Responsibilities
There are different lease types such as single net lease (N), double net lease (NN), triple net leases (NNN), full service gross, and modified gross lease (modified net lease). It’s important to understand the pros and cons of each so you can choose which one is best for you.
As an investor, NNN or absolute NNN lease means minimal landlord responsibilities. This works great for a busy professional who is looking for passive investment. Single-tenant properties would normally have such a lease in place.
Guarantor being a corporate, franchisee, or personal
Look at who is behind the lease. National Credit Tenants, are tenants that carry investment-grade rating based on the size of the company and financial strength. Such a tenant provides great security to investors. It is preferred that the guarantor is corporate. If not, it should be a franchisee or a personal guarantor.
Rigorous assignment
If possible, the lease should not be assignable. However, if it is assignable, you want to make sure that you have a rigorous assignment term. Put some limitations, whether it is in the units or net worth in terms of dollars. This is to give you the best long-term security.
Indemnification language
Ask your attorney about the indemnification language, you want to have indemnification against environmental issues to give you more security over the long term. If possible, the tenant should have full indemnification against any long term environmental issues.
For more information about Commercial Real Estate- The Key Factors About Lease Provisions That Become Detrimental To The Value Of An Investment Property, Visit our website.
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Table of Contents
Things You Need to be Pre-Approved for a Mortgage
Which Moving Company Should You Use?
What to Look for in a Foreclosure Deal
What Does That Mean – Mortgage Type
Mortgage Loan Rejection: What Next?
Pennywise Moves for Retirees
How to use Natural Lighting to Enhance Your New Home
5 Factors to Consider Before Purchasing a Vacation Home
5 Tips for Families Living on One Income
Tips for Dealing With a Debt Collector
Advantages of Using Furniture Pads When You Move
First Time Home Buyers’ Incentives
Get Rid of Dark Spaces
Some Compelling Reasons to Start a Home Garden
Thinking Outside the Box Lamp
Novice Moving Day Mistakes and Expert Solutions
Should You Install Skylights?
Are You an Ambitious House Seller?
Prepare for a Home Search
Apps for Monitoring Your Energy Use
Pick Up a Smart House Device Without Breaking Your Budget
Why You Should Be Cautious About Home Size
Should You Buy A Home Outside Of Your Budget?
Things You Need to Consider Before You Host a House Showing
Reasons to Tailor Your Home Search to Your Budget
How To Make Flat-Pack Furniture Seem Built In
Tips on Creating a Luxurious Indoor Swimming Pool Area
Key Reasons to Trust a Home Inspection Report
Execute a House Selling Plan
Common Home Selling Problems and How to Avoid Them
Tips to Remember When Staging Your Home to Sell
Step-by-Step: Creating a Cubby Bookshelf
3 Reasons to Buy a Small Town Home
Use Vertical Space as a Storage Solution
What Should You Do If You Suspect Identity Theft
Financial Planning: What is the Estate Tax?
Aromatherapy for a Mood-Lifting Home Environment
Amazing Indoor Water Feature Ideas
How to Remove Old Carpet
Green Features: What Buyers Are Looking For
How to Make a Good Impression on Home Buyers
Commercial Real Estate Illinois Table of Contents
How Corona Pandemic (Covid-19) Affects Commercial Real Estate Market