Demystifying the Commercial Lease: Types of Leases

Whitman Legal Solutions, LLC
Contact

Whitman Legal Solutions, LLC

Every fall, many parents of fourth graders rent an instrument for their child’s school music program. The task is particularly daunting for those renting a string instrument.

Although introductory band instruments come in one size, string instruments come in many sizes, with violins ranging from 1/32 size to 4/4 (or full) size. Most fourth graders need a ½ or ¾ size. To make violin selection more confusing, a ½ size isn’t half the size of a full-size instrument. Rather, for violins, a ½ size is approximately 90% the size of a full-size violin.

Determining the correct instrument size may be the easiest decision when renting a string instrument. After selecting the proper size, parents face several different rental packages, with names such as “Standard,” “Premium,” “Deluxe,” and “Premier,” with the price of the “top” package costing three times that of the standard package.

Lower priced packages, in particular, may require a minimum one-year commitment. Higher priced packages usually boast a better-quality instrument. Some packages may include a service contract for new strings and bow rehair or “insurance” against damage. Most shops offer a rent-to-own option where part of the rental price can be applied to a subsequent instrument purchase. The myriad of rental options can transform an exciting adventure into instrumental music into a frustrating and stressful experience.

Like instrumental music parents, business owners also may face numerous commercial real estate lease options. Whether they are entering into their first commercial lease or are expanding their operations, business owners likewise may find that an exciting time can be wrought with stress and frustration.

This is the first in a series of articles designed to demystify the commercial real estate lease experience. This article discusses the basic types of commercial leases.

Types of Leases

The names of the lease types alone can be mind boggling--full service, modified gross, gross, triple net, double net, and single net being the most common types. The type of lease will vary depending upon the asset class, building type, building class, and the landlord’s and tenant’s needs.

Commercial real estate leases are not one-size-fits all. Business owners who are prospective tenants should know the differences between these lease types so they can understand the total lease cost and the risks they are assuming.

Full Service Lease

A full service lease (also called a gross lease) is most common in office buildings. Full service leases are rare in leases for retail, warehouse, or other asset classes. Under a full service lease, the tenant plays a monthly, all-inclusive monthly rent amount. The tenant does not pay for utilities, real estate taxes or insurance, or maintenance costs to the building. Usually, the tenant also does not pay for cleaning or trash collection.

Under a full service lease, the landlord pays for all building operations expenses, including taxes, insurance, utilities, maintenance costs for the building and rental unit, and cleaning services. The landlord also takes care of common area maintenance (CAM) expenses. CAM expenses include repairs and maintenance for the lobby, elevators, grounds, parking lot, and other areas not allocated to a specific tenant.

Landlords or their property managers usually charge a fee to manage building maintenance. That fee is included in CAM expenses.

Even though the landlord is responsible CAM, each tenant pays its pro rata share of CAM expenses. Often, leases have a base amount of CAM “buried” in the rent charges. In those instances, tenants should expect annual increases in CAM charges. Detailed discussion of CAM expense negotiations is beyond the scope of this article and will be covered in a future article.

A full service lease provides the most predictable monthly expense amount for tenants. Tenants need not concern themselves with building maintenance or repairs and can instead focus on running their businesses. In exchange, the tenants give up control over building operations and expenses, even though they are responsible for CAM increases.

Triple Net Lease

A triple net (NNN) lease is frequently used when a tenant rents an entire building, such as when a pharmacy rents the entire building in a shopping center out lot or office buildings divided into condominiums. NNN leases also may be used for industrial tenants.

With a triple net lease, the tenant pays the landlord a monthly rental amount, which is lower than under a full service lease. Also, the tenant must pay all real estate taxes, insurance, utilities, cleaning services, and maintenance costs for its rental area.

NNN leases are not common in multi-tenant buildings. Unless the building has a condominium or similar ownership structure, double net leases (discussed below) probably will be more suitable.

Where there are multiple tenants in a NNN lease building, each tenant usually will have separate utility and HVAC units. With multi-tenant buildings, as with condominiums, it is likely there will be a shared parking lot, elevators, or other common areas, and NNN lease tenants will pay their pro rata shares CAM or condominium fees.

A NNN lease will place all building maintenance costs, including CAM and external and structural repairs, on the tenant. Where a tenant leases the entire building, the tenant may even be required to rebuild the building if it is damaged or destroyed in a casualty. Where there are multiple tenants in the building, a NNN lease is more likely to require that tenants only maintain the interior of their rental spaces, as well as any HVAC, roof, facades specific to their spaces.

NNN leases may result in a fluctuating monthly rental expense for the tenant, including potentially large expenses for building repairs and maintenance. However, the NNN tenant usually has more control over operational decisions and expenses for its rental space.

Hybrid Leases

Where neither a full service lease nor a NNN lease meets the landlord’s and tenants’ needs, there are several hybrid lease types. These may be called modified gross, double net, or single net leases.

Modified gross leases are common in smaller office building and retail leases. Under a modified gross lease, the landlord usually will pay for taxes and insurance and will arrange for common area maintenance. In addition to monthly rent, the tenant typically will pay its pro rata share of CAM expenses.

A modified gross lease tenant usually must pay for cleaning services and sometimes trash collection or routine maintenance (such as lightbulbs) for its rental space. If the tenant’s space has separate utility metering, a modified gross lease may require the tenant to pay its utilities.

Double net leases are common with shopping centers or malls. With a double net lease, the tenant pays the landlord a monthly rental amount and also must pay property taxes and insurance. However, unlike with a NNN lease, the landlord pays for building maintenance costs, which can be unpredictable. If there are multiple tenants in the building, the landlord usually will arrange for CAM, and tenants will pay their pro rata CAM charges. Since tax and insurance amounts and payment dates are predictable, a double net lease makes it easier for a tenant to predict- lease expenses.

A single net lease is like a full service lease, except the tenant typically will pay real estate taxes. Since real estate tax increases may not be predictable, a single net lease shifts that risk to the tenant. Since gross leases also often are structured to shift all risks of tax increases to the tenants, true single net leases are rare.

Expenses Tenants Always Pay

Different lease types allocate building maintenance, taxes, utilities, and insurance differently between landlord and tenant. However, all leases require tenants to pay certain costs.

For instance, the building’s insurance only covers the landlord and building. The landlord’s insurance does not cover the tenant. Tenants must obtain their own property and liability insurance. Many commercial leases mandate separate tenant liability insurance policies.

Tenants also must pay personal and intangible property taxes for their property. For some leases and asset classes, this might include taxes on property affixed to the real estate.

Finally, commercial tenants almost always pay for certain utility charges, such as telephone, cable, and Internet. Tenants also may have to pay the cost of wire or cable to install those services.

Selecting the Lease Type

Business owners should know the differences between lease types when comparing lease proposals. Prospective tenants should calculate actual operational costs, including CAM, taxes, insurance, utilities, and maintenance for each lease.

Tenants also should consider their ability to pay unexpected expenses, which are likely with NNN and some hybrid leases. A start-up business might want a lease that provides for a predictable monthly amount, even if it costs more over the term of the lease. Likewise, a tenant that lacks the experience to repair and maintain the real estate might prefer to have the landlord handle those items.

When I faced the myriad of violin rental options–I chose an option not covered by this article–purchasing a violin. Since I had more knowledge about violins then the uninitiated parent, I was able to perform some services included in the stores’ rental packages. For our family, the cost of purchasing a violin was less than the annual rental charges.

Some business owners likewise should consider real estate purchase as an alternative to leasing. Listing real estate brokers represent the landlord, not the tenant. They are not necessarily looking out for tenants’ interests and may not be programmed to think about ownership as an option. Therefore, each tenant should consult with its attorney and its real estate or financial professionals to help determine the commercial real estate arrangement which best meets the tenant’s business needs.

This series draws from Elizabeth Whitman’s background in and passion for classical music to illustrate creative solutions for legal challenges experienced by businesses and real estate investors.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Whitman Legal Solutions, LLC | Attorney Advertising

Written by:

Whitman Legal Solutions, LLC
Contact
more
less

Whitman Legal Solutions, LLC on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide

JD Supra Privacy Policy

Updated: May 25, 2018:

JD Supra is a legal publishing service that connects experts and their content with broader audiences of professionals, journalists and associations.

This Privacy Policy describes how JD Supra, LLC ("JD Supra" or "we," "us," or "our") collects, uses and shares personal data collected from visitors to our website (located at www.jdsupra.com) (our "Website") who view only publicly-available content as well as subscribers to our services (such as our email digests or author tools)(our "Services"). By using our Website and registering for one of our Services, you are agreeing to the terms of this Privacy Policy.

Please note that if you subscribe to one of our Services, you can make choices about how we collect, use and share your information through our Privacy Center under the "My Account" dashboard (available if you are logged into your JD Supra account).

Collection of Information

Registration Information. When you register with JD Supra for our Website and Services, either as an author or as a subscriber, you will be asked to provide identifying information to create your JD Supra account ("Registration Data"), such as your:

  • Email
  • First Name
  • Last Name
  • Company Name
  • Company Industry
  • Title
  • Country

Other Information: We also collect other information you may voluntarily provide. This may include content you provide for publication. We may also receive your communications with others through our Website and Services (such as contacting an author through our Website) or communications directly with us (such as through email, feedback or other forms or social media). If you are a subscribed user, we will also collect your user preferences, such as the types of articles you would like to read.

Information from third parties (such as, from your employer or LinkedIn): We may also receive information about you from third party sources. For example, your employer may provide your information to us, such as in connection with an article submitted by your employer for publication. If you choose to use LinkedIn to subscribe to our Website and Services, we also collect information related to your LinkedIn account and profile.

Your interactions with our Website and Services: As is true of most websites, we gather certain information automatically. This information includes IP addresses, browser type, Internet service provider (ISP), referring/exit pages, operating system, date/time stamp and clickstream data. We use this information to analyze trends, to administer the Website and our Services, to improve the content and performance of our Website and Services, and to track users' movements around the site. We may also link this automatically-collected data to personal information, for example, to inform authors about who has read their articles. Some of this data is collected through information sent by your web browser. We also use cookies and other tracking technologies to collect this information. To learn more about cookies and other tracking technologies that JD Supra may use on our Website and Services please see our "Cookies Guide" page.

How do we use this information?

We use the information and data we collect principally in order to provide our Website and Services. More specifically, we may use your personal information to:

  • Operate our Website and Services and publish content;
  • Distribute content to you in accordance with your preferences as well as to provide other notifications to you (for example, updates about our policies and terms);
  • Measure readership and usage of the Website and Services;
  • Communicate with you regarding your questions and requests;
  • Authenticate users and to provide for the safety and security of our Website and Services;
  • Conduct research and similar activities to improve our Website and Services; and
  • Comply with our legal and regulatory responsibilities and to enforce our rights.

How is your information shared?

  • Content and other public information (such as an author profile) is shared on our Website and Services, including via email digests and social media feeds, and is accessible to the general public.
  • If you choose to use our Website and Services to communicate directly with a company or individual, such communication may be shared accordingly.
  • Readership information is provided to publishing law firms and authors of content to give them insight into their readership and to help them to improve their content.
  • Our Website may offer you the opportunity to share information through our Website, such as through Facebook's "Like" or Twitter's "Tweet" button. We offer this functionality to help generate interest in our Website and content and to permit you to recommend content to your contacts. You should be aware that sharing through such functionality may result in information being collected by the applicable social media network and possibly being made publicly available (for example, through a search engine). Any such information collection would be subject to such third party social media network's privacy policy.
  • Your information may also be shared to parties who support our business, such as professional advisors as well as web-hosting providers, analytics providers and other information technology providers.
  • Any court, governmental authority, law enforcement agency or other third party where we believe disclosure is necessary to comply with a legal or regulatory obligation, or otherwise to protect our rights, the rights of any third party or individuals' personal safety, or to detect, prevent, or otherwise address fraud, security or safety issues.
  • To our affiliated entities and in connection with the sale, assignment or other transfer of our company or our business.

How We Protect Your Information

JD Supra takes reasonable and appropriate precautions to insure that user information is protected from loss, misuse and unauthorized access, disclosure, alteration and destruction. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. You should keep in mind that no Internet transmission is ever 100% secure or error-free. Where you use log-in credentials (usernames, passwords) on our Website, please remember that it is your responsibility to safeguard them. If you believe that your log-in credentials have been compromised, please contact us at privacy@jdsupra.com.

Children's Information

Our Website and Services are not directed at children under the age of 16 and we do not knowingly collect personal information from children under the age of 16 through our Website and/or Services. If you have reason to believe that a child under the age of 16 has provided personal information to us, please contact us, and we will endeavor to delete that information from our databases.

Links to Other Websites

Our Website and Services may contain links to other websites. The operators of such other websites may collect information about you, including through cookies or other technologies. If you are using our Website or Services and click a link to another site, you will leave our Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We are not responsible for the data collection and use practices of such other sites. This Policy applies solely to the information collected in connection with your use of our Website and Services and does not apply to any practices conducted offline or in connection with any other websites.

Information for EU and Swiss Residents

JD Supra's principal place of business is in the United States. By subscribing to our website, you expressly consent to your information being processed in the United States.

  • Our Legal Basis for Processing: Generally, we rely on our legitimate interests in order to process your personal information. For example, we rely on this legal ground if we use your personal information to manage your Registration Data and administer our relationship with you; to deliver our Website and Services; understand and improve our Website and Services; report reader analytics to our authors; to personalize your experience on our Website and Services; and where necessary to protect or defend our or another's rights or property, or to detect, prevent, or otherwise address fraud, security, safety or privacy issues. Please see Article 6(1)(f) of the E.U. General Data Protection Regulation ("GDPR") In addition, there may be other situations where other grounds for processing may exist, such as where processing is a result of legal requirements (GDPR Article 6(1)(c)) or for reasons of public interest (GDPR Article 6(1)(e)). Please see the "Your Rights" section of this Privacy Policy immediately below for more information about how you may request that we limit or refrain from processing your personal information.
  • Your Rights
    • Right of Access/Portability: You can ask to review details about the information we hold about you and how that information has been used and disclosed. Note that we may request to verify your identification before fulfilling your request. You can also request that your personal information is provided to you in a commonly used electronic format so that you can share it with other organizations.
    • Right to Correct Information: You may ask that we make corrections to any information we hold, if you believe such correction to be necessary.
    • Right to Restrict Our Processing or Erasure of Information: You also have the right in certain circumstances to ask us to restrict processing of your personal information or to erase your personal information. Where you have consented to our use of your personal information, you can withdraw your consent at any time.

You can make a request to exercise any of these rights by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

You can also manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard.

We will make all practical efforts to respect your wishes. There may be times, however, where we are not able to fulfill your request, for example, if applicable law prohibits our compliance. Please note that JD Supra does not use "automatic decision making" or "profiling" as those terms are defined in the GDPR.

  • Timeframe for retaining your personal information: We will retain your personal information in a form that identifies you only for as long as it serves the purpose(s) for which it was initially collected as stated in this Privacy Policy, or subsequently authorized. We may continue processing your personal information for longer periods, but only for the time and to the extent such processing reasonably serves the purposes of archiving in the public interest, journalism, literature and art, scientific or historical research and statistical analysis, and subject to the protection of this Privacy Policy. For example, if you are an author, your personal information may continue to be published in connection with your article indefinitely. When we have no ongoing legitimate business need to process your personal information, we will either delete or anonymize it, or, if this is not possible (for example, because your personal information has been stored in backup archives), then we will securely store your personal information and isolate it from any further processing until deletion is possible.
  • Onward Transfer to Third Parties: As noted in the "How We Share Your Data" Section above, JD Supra may share your information with third parties. When JD Supra discloses your personal information to third parties, we have ensured that such third parties have either certified under the EU-U.S. or Swiss Privacy Shield Framework and will process all personal data received from EU member states/Switzerland in reliance on the applicable Privacy Shield Framework or that they have been subjected to strict contractual provisions in their contract with us to guarantee an adequate level of data protection for your data.

California Privacy Rights

Pursuant to Section 1798.83 of the California Civil Code, our customers who are California residents have the right to request certain information regarding our disclosure of personal information to third parties for their direct marketing purposes.

You can make a request for this information by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

Some browsers have incorporated a Do Not Track (DNT) feature. These features, when turned on, send a signal that you prefer that the website you are visiting not collect and use data regarding your online searching and browsing activities. As there is not yet a common understanding on how to interpret the DNT signal, we currently do not respond to DNT signals on our site.

Access/Correct/Update/Delete Personal Information

For non-EU/Swiss residents, if you would like to know what personal information we have about you, you can send an e-mail to privacy@jdsupra.com. We will be in contact with you (by mail or otherwise) to verify your identity and provide you the information you request. We will respond within 30 days to your request for access to your personal information. In some cases, we may not be able to remove your personal information, in which case we will let you know if we are unable to do so and why. If you would like to correct or update your personal information, you can manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard. If you would like to delete your account or remove your information from our Website and Services, send an e-mail to privacy@jdsupra.com.

Changes in Our Privacy Policy

We reserve the right to change this Privacy Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our Privacy Policy will become effective upon posting of the revised policy on the Website. By continuing to use our Website and Services following such changes, you will be deemed to have agreed to such changes.

Contacting JD Supra

If you have any questions about this Privacy Policy, the practices of this site, your dealings with our Website or Services, or if you would like to change any of the information you have provided to us, please contact us at: privacy@jdsupra.com.

JD Supra Cookie Guide

As with many websites, JD Supra's website (located at www.jdsupra.com) (our "Website") and our services (such as our email article digests)(our "Services") use a standard technology called a "cookie" and other similar technologies (such as, pixels and web beacons), which are small data files that are transferred to your computer when you use our Website and Services. These technologies automatically identify your browser whenever you interact with our Website and Services.

How We Use Cookies and Other Tracking Technologies

We use cookies and other tracking technologies to:

  1. Improve the user experience on our Website and Services;
  2. Store the authorization token that users receive when they login to the private areas of our Website. This token is specific to a user's login session and requires a valid username and password to obtain. It is required to access the user's profile information, subscriptions, and analytics;
  3. Track anonymous site usage; and
  4. Permit connectivity with social media networks to permit content sharing.

There are different types of cookies and other technologies used our Website, notably:

  • "Session cookies" - These cookies only last as long as your online session, and disappear from your computer or device when you close your browser (like Internet Explorer, Google Chrome or Safari).
  • "Persistent cookies" - These cookies stay on your computer or device after your browser has been closed and last for a time specified in the cookie. We use persistent cookies when we need to know who you are for more than one browsing session. For example, we use them to remember your preferences for the next time you visit.
  • "Web Beacons/Pixels" - Some of our web pages and emails may also contain small electronic images known as web beacons, clear GIFs or single-pixel GIFs. These images are placed on a web page or email and typically work in conjunction with cookies to collect data. We use these images to identify our users and user behavior, such as counting the number of users who have visited a web page or acted upon one of our email digests.

JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

  • HubSpot - For more information about HubSpot cookies, please visit legal.hubspot.com/privacy-policy.
  • New Relic - For more information on New Relic cookies, please visit www.newrelic.com/privacy.
  • Google Analytics - For more information on Google Analytics cookies, visit www.google.com/policies. To opt-out of being tracked by Google Analytics across all websites visit http://tools.google.com/dlpage/gaoptout. This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit http://www.aboutcookies.org which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at: privacy@jdsupra.com.

- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.