Real Estate Investing: Adjusted Gross Lease

It is imperative that the lease structure of a property selected be just as suitable as the property. Commercial leases can be gross, adjusted gross or net leases. In a gross lease, the lessor is responsible for the payment of utilities, taxes, maintenance and the property insurance; the lessee has to pay the lessor a base rent, which includes all the charges. The lessee has to agree to pay his share of any increases that may occur in the base operating expense. In some cases, the lessee just pays a fixed base rent for the duration of the lease and agrees to pay for any increase in the operating expenses as well as the maintenance dues at the end of the first year of the lease. What Is An Adjusted Gross Lease?

A modified or adjusted gross lease is similar to a gross lease except that it excludes some basic services that are typically provided by landlords such as the responsibility to pay their taxes, insurance, maintenance and utility bills. In some adjusted gross leases, the landlord is not responsible to pay for maintenance; janitorial services, electricity, and these charges are not included in the base rent. An adjusted gross lease is very useful for multi-tenant properties as each of the lessee has different needs and keeps different timings, hence they would prefer to have separate meters to measure the utility usage such as electricity and water. Separate meters will prevent any dispute regarding the pro-rata share each has to pay. Like for example in a multi-tenant building, let us consider two of the tenants. A is operating a boutique and opens from 9 am to 9 pm, Monday to Saturday, where as B is a dentist who works from 8 am to 8 pm, Monday to Friday. Separate meters will ensure that one tenant does not end up paying a part of the expenses of another tenant. The tenants are responsible to pay for their share of the utility bills.

Base rent in an adjusted gross lease is usually higher than a net lease due to the pass through feature of the lease. Pass through refers to the method of making the lessee pay a proportionate share, to pay for any increase in the operating expenses at the end of a base year. The recoverable expenses will be borne initially by the landlord, which can be calculated based on dollar per square foot, or a pre-defined amount. An adjusted gross lease is more equitable than a gross lease. Lease agreements need to be understood clearly and the help of an attorney sought to comprehend its entire content. Make sure that the property selected and the type of lease suits your needs. There are firms that help businesses run successfully by offering their services as well as products.

Real Estate Investing: Triple Net Lease

A net lease refers to a lease agreement where the lessee is responsible for paying the property taxes, maintenance, insurance, for the utilities and for the janitorial services. Of the net leases, the most common type is a triple net lease.

Triple Net Lease or NNN Lease: A triple net is also known as a NNN lease. As per a triple net lease, the tenants are responsible for operating and maintaining the property as well as the common area maintenance, which will be divided among the tenants in proportion to the area they rent. The landlord is responsible only for the structural integrity of the building. The tenant pays the landlord a base monthly rent and is responsible for the maintenance and the operational costs of all utilities as well as that of the property. The tenant has a few legal defenses to relieve him of his responsibility while using a triple net lease.

Absolute Triple Net Lease: It is also referred to as a bond lease. It is similar to a NNN lease, but differs in that the tenant has no legal defenses if he fails to meet his responsibility of paying the maintenance and operational costs, property taxes and insurance, utility and janitorial expenses etc.

Investors dealing in commercial real estate look out for multi-tenant properties that have triple net leases, as all they have to do is deal with how to invest the rent paid by the tenants. They like properties with triple net leases as they are not bothered by management obligations and have an assured income. On finding such a property, they have to take extra care with the due-diligence and study every document relating to the building as well as study the lease agreement in detail seeking the counsel of an experienced attorney.

Triple net leases have to be carefully drafted to compensate for inflation as well as tax increases, which could influence the rent and thereby affect the lease. The landlord should be very careful in selecting tenants by checking their credit worthiness, the type of business they do and how it will have a positive or negative impact on the property has to be analyzed carefully. If an investor is buying a property with a triple net lease tenant or tenant, the lease agreement has to be carefully scrutinized and the lease term has to be checked, and then carefully reviewed to see if the existing tenants would agree to an increase in the base rent as well as check the credit worthiness of the tenants. It is an investors dream to land a multi-tenant commercial property with a true triple net lease but they are a rarity.

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