Tips for Lease with commercial tenant?

[Ska2free]

Hoping someone here may have some good tips for what to include (and not include) in a lease agreement with a commercial tenant.

Basic details: it is new construction, light industrial space. My company occupies one half of the building, so we'll constantly have an eye on things...but we really want to structure the lease so that they have to be fairly self-sufficient. I think I've heard some term for this kind of lease (where the owner is mostly hands off), but can't recall it.

I think we're in a position to require at least 3 years, and there will likely be some build-out to suit. Not sure if we want to handle the construction costs and build it into their lease rate, or just have the requirement that we approve their plans and contractor. Anyone have advice on this?

Thanks!

 

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[JWatchdog]

I think what you are asking for is called a Triple Net Lease- basically where the tenant agrees to pay all real estate taxes, building maintenance and insurance (lets not forget your monthly payment as well) so your focus can be elsewhere. other then that I would not know how to structure a commercial NNN. I hope all goes well

 

[Kung Fu Steve]

I deal with my landlord once in a while. When I expanded I took over more space. He wanted a 7 year(!) lease. I negotiated down to a 3+2+2. In my community there are empty spaces EVERYWHERE so it's easy for me to negotiate.

Rent is getting pricey for me so I'm looking at buying a building myself. (Couple nice ones just went up for sale)

Not sure exactly what advice your looking for - from what I read I think you're asking "what terms do I offer" (??)

In that case I think build out is a must these days, but from your side you slip that into the lease agreement for them to pay an extra dollar or so per sq ft. (which ends up being way more in the end - as long as they stay put). If you have your own construction crew, doing a shell buildout shouldn't take more than 20k. (This is the number I'm used to with 2,000+ sq ft spaces)

Example: 2,000 sq ft space

$15/ft = 30,000/yr = 2,500/mo
$16/ft = 32,000/yr = 2,666/mo

I know we are on an escalating scale so year one is a certain amount, year two, blah blah. But the first year is basically covering mortgage expenses and the cash layout up front. Every year there after is profit (and increasing on the escalating scale).

Not sure if this is even what you're looking for but I hope it helps.

 

[Ska2free]

Thanks to both replies so far! Yes, triple net is the term I couldn't remember...I appreciate the explanation, because now I realize thats not what we want. Guess we want them to do interior maintenance and insurance, but it's just easier for me to do the rest (from the owner occupied side).

Appreciate hearing your thoughts, Steve...it's the same here, more spaces available than tenants. We are still waiting to hear what scale of build out will be necessary, but it shouldn't be too intense...prob best to just do it and build it into lease cost. We have a realtor to help with the process of course, but I just hate not knowing a lot about how it all works. When we leased office space, our landlord was extremely laid back and hands off...some simple boiler plate lease. Just wanted to think things through a bit more now that we are on the other side of things...

 

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[AJGlobal]

Thanks to both replies so far! Yes, triple net is the term I couldn't remember...I appreciate the explanation, because now I realize thats not what we want. Guess we want them to do interior maintenance and insurance, but it's just easier for me to do the rest (from the owner occupied side).

Appreciate hearing your thoughts, Steve...it's the same here, more spaces available than tenants. We are still waiting to hear what scale of build out will be necessary, but it shouldn't be too intense...prob best to just do it and build it into lease cost. We have a realtor to help with the process of course, but I just hate not knowing a lot about how it all works. When we leased office space, our landlord was extremely laid back and hands off...some simple boiler plate lease. Just wanted to think things through a bit more now that we are on the other side of things...

I have been on the owner side of a lease and and the lessee side so I know how they work both ways. My industrial condo suite I own I did a Gross lease with the tenant for 3 years. Every went well that way. Triple Nets is the norm but I'm not a big fan of them. I don't like how the lessee get stuck with a tax bill to a building they don't own.

I'm currently working on a lease and there is a lit of paticuliars that we keep going back and forth on. Do you homework or you will get screwed. Even the brokers are trying to push me to get it done so they can get there dam commission check. Starting to piss me off.

 

[Ska2free]

Thanks AJ! Would you mind sharing what your sticking points have been, and why you feel they are critical to get right?

I did some research, and think a gross lease is probably what fits best for us, though with some modification...prob want tenant to cover their own electric, and maybe insurance. Is there some benefit to me carrying the insurance on that portion of the building, bundled with my own? I will ask my agent, but curious to hear opinions.

 

[CarrieW]

I only vaguely know anythng about this but I thought the triple net leases were for like 99 yrs and big chain stores like walmart and cell phone towers?

eventually we would love to own commercial real estate so I am interested in watching how this thread progresses!

I wouldnt trust a tennant to pay taxes on a property I owned.. what happens if they dont pay it? then your the one on the hook for the bill. where we used to live the water was a leinable utility so almost all landlords would pay for the water and include it in the rent just to protect themselves for just that reason.

 

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[AJGlobal]

Thanks AJ! Would you mind sharing what your sticking points have been, and why you feel they are critical to get right?

I did some research, and think a gross lease is probably what fits best for us, though with some modification...prob want tenant to cover their own electric, and maybe insurance. Is there some benefit to me carrying the insurance on that portion of the building, bundled with my own? I will ask my agent, but curious to hear opinions.

On smaller buildings gross leases work well but on larger buildings most owners require that the person leasing pays the NNN as is the case with a deal I'm working on now. The bottom line is to get where you need to be from a monthly nut standpoint. The base price per sq ft can be negotiated to accommodate this but the NNN cannot. The NNN may go up or down from year to year. Right now taxes are going down. Also a lot of investors that own these commercial buildings go that direction vs doing residential because the renter paying the NNN is the norm. As an owner you need to carry ins on the building itself, as a renter you want to and will need to carry liability ins and ins to cover your build out should something happen.

In the case where I did a gross lease as the owner my tenant was required to provide me with proof of insurance and have me additional insured on his policy.

The current deal I'm working on has me paying for all the utilities and maintenance of the building. We will do a due diligence on everything before taking possession so that anything that needs to be fixed before we move in gets taken care of. Commercial buildings here in Phx are in abundance right now with vacancy so there is a lot I'm working into the lease. Build out time without paying rent and then a pro rated rent after, which is negotiable.