Leases, Rental

Real estate leases are typically broken down into the following categories, though occasionally you may see a creative combination of more than one type:

The flat lease, which is the oldest and simplest type of lease, is becoming harder to find but is the best deal for he lessee because it’s based on a set price for a set period of time. The danger here is not to be tempted if the term is too short, because a series of short-term leases could cost more in the long run. If your rent term is short but you love your location, you could wind up paying the landlord’s high rent increases over and over again.

The step lease attempts to second-guess what the landlord’s expenses (for taxes, insurance, and maintenance) will be in the future and compensates for them by increasing the rent each year. Therefore, the lease rate may make step increases over the term of the agreement: 1st year, $1450/month; 2nd year, $1480/month; 3rd year, $1510/month; 4th year, $1540/month;5th year, $1570/month.

The net lease takes the guesswork out of the step lease problem. You pay the base rent, and when the taxes go up, you pay the dollar increase or your share if more than one tenant his housed within the same facility. Where proportionate sharing occurs, your share is based on the square footage you occupy as a proportion of the total size of the facility. If store A has 1,450 square feet, store B has 2,400 square feet, and store C has 850 square feet, then the building has a total of 4,700 square feet. Let’s say taxes on the building property are $880, or 18.7 cents per square foot. So store A’s share of the tax is $1,450 x 18.7 cents or $271.15per yearr. Store B’s share is $2,400 x 18.7 cents or $448.80 per year, and store C’s tax increase is $850 x 18.7 cents or $158.per year. This method ensures that everyone pays their fair share.

The double-net lease is a net-net version of the net lease that picks up added insurance premiums as well as tax increases, singularly or on a proportionate basis. However, if you do something in your business that raises insurance premiums, you alone will pick up the tab.

The triple-net lease is the most popular version of the net lease and includes similar sharing by tenants of costs for repairs to the building or parking area, as well as taxes and insurance.

The cost-of-living lease is different from other leases described above in that specific expenses aren’t included in this lease; instead, it takes inflation into account by referring to the government’s Cost of Living Index. If, at the end of the year, inflation has been, say, 4.5 percent, your rent will increase by that amount.

Landlords favor the percentage lease because it allows them to “share the wealth” of a tenant’s prospering business. It sets a minimum or base rent to be paid and/or a percentage of the business’s gross, whichever is the largest number. Such percentages commonly run from 3 to 12 percent, depending on the area, type of business, and desirability of the location. These percentages are usually paid on a quarterly, semi-annual, or annual basis and are adjusted backward, though many shopping centers require a monthly accounting and payment.

The percentage lease is most common for properties in prime retail areas. Within those prime areas, specific locations (for example, corner locations) may be subject to a higher percentage rate. If you have a percentage lease, the lessor probably requires you to periodically furnish proof of gross sales. This is done by examining your books, sales tax records, or, in some cases, by sending a copy of the appropriate attachment to your IRS Form 10400.