This post originally appeared on Burt M. Polson’s Real Estate Journal and is republished with permission. Find out how to syndicate your content with theBrokerList.
Photo by Hermes Rivera on Unsplash
Whether you are a tenant or a landlord, we look to the rental amount first in lease negotiations or when purchasing an investment property. However, the amount of rent paid is only a small part to be considered.
Depending on your position, the tenant or landlord looks out for their best interests, respectively. It is part of my job as a broker to move negotiations to an amenable solution.
When purchasing a leased investment property, a buyer is acquiring the property subject to existing leases. They must have a thorough understanding of the terms and conditions of the leases. In either case, it may be essential to have legal counsel review lease agreements.
Below is a list of terms and conditions to consider.
Rent
Depending on where you are located, rent could be quoted on a rate per square foot per month or per year. It could also be listed as an amount per month. For example, in Northern California, we usually see rent quoted as $3.00 per square foot/month. If you were on the East Coast, this would be represented annually at $36.00 per square foot/year.
In addition to the rent, there may be pass-through expenses based on the amount of space leased. This could include triple-net (NNN), double or single-net, a common-area-maintenance (CAM) fee, or modified-gross rent. Gross and full-service rents are usually all-inclusive.
Expense pass-throughs are different depending on the property and the landlord. Both the tenant and the landlord should read and thoroughly understand what is and is not included in the reimbursement. Additionally, triggers such as a property sale could change some of the expenses assessed, such as property taxes.
Landlords will also require increases in the rent, with most occurring annually. A rent increase could be tied to the CPI (Consumer Price Index) for your area, or it could be a fixed amount or percentage.
Term
The term usually refers to the length of the lease. It could be anywhere from a month-to-month lease to a ten-year lease or more with options to extend. Much is dependent on the type of property and user.
An option-to-extend provides the tenant a unilateral right to extend the lease for an already agreed to length of time and rent. Options are not always offered but usually a part of negotiations. The exercise of an option usually must be completed within a set period of time.
Early Termination Clause
We may be seeing more early termination clauses in today’s market, especially in an office or retail-type property. Essentially, an early termination, opt-out, or break clause provides the tenant the right to terminate the lease upon a specific condition and timeline. The condition could be upon a particular stock valuation, a merger or acquisition of the company, a specific drop in gross sales, or even an outside event such as the delay in developing a new apartment complex next door.
In either case, exercising an early termination clause by a tenant usually includes some type of remuneration to the landlord to exercise.
In part two, we will discuss tenant improvements, options to buy, and the lease agreement format.
Burt M. Polson is the CEO of ACRESinfo.com, a commercial real estate brokerage company, and CEO of StoneMarkerInvestments.com, a private equity real estate fund. Call him at (707) 254-8000 or email [email protected] and [email protected]
