Not everyone can afford to buy residential real estate and not every company wants to purchase their space. For those reasons we have leasing and renting.
According to City-Data.com, as of 2010, 40% of all residential real estate in Santa Clara County is leased or rented. The difference between a lease or rental agreement is usually the length of term. Rental agreements are typically month to month and can be canceled by either party. The landlord can increase the rent at any time leaving the tenant with financial uncertainty. A lease is written for a single or multiple years and gives the landlord security that they have a tenant for that term, and gives the tenant security since the rent is clearly spelled out. The lease gives the tenant additional security if the property is sold, as the lease would survive the sale. This means that the new owner would be legally required to honor the agreement.
Commercial leases are more complex and there are many different types of lease agreements. Each offers both the lessor and lessee a different cost, responsibility and benefit. Here are the most common:
Triple Net Lease – is a lease where the tenant or lessee agrees to pay all real estate taxes, building insurance, and maintenance on the property in addition to normal rent. In such a lease, the tenant or lessee is responsible for all costs associated with the repair and maintenance of the building and any common area. This form of lease is most frequently used for commercial freestanding buildings and retail space. As with any lease, the lease will survive the sale of the property. The one caveat is that in either the triple, double or single net leases, if the building is sold and the property taxes of the new owner are higher, those increases can be passed on to the tenant.
Double Net Lease – the lessee or tenant is responsible for real estate taxes and commercial property insurance. The lessor or landlord is responsible for any expenses incurred for structural repairs and common area maintenance. This can also be used in any type of commercial lease property. The most common forms of the Double Net are where the landlord is responsible for roof, building and parking lot, and the tenant is responsible for everything else. All of this can vary from lease to lease.
Single Net Lease – the lessee or tenant is responsible for paying property taxes as well as the base rent. This can be used in any type of commercial lease property.
Gross or Industrial Gross Lease – is a fully serviced lease where the landlord pays all or most of the expenses associated with the property. Very often, the costs are passed onto the tenants in rent in what is referred to as a load factor. Gross leases are usually used in office properties and warehouse space, but can be used in retail leases as well.
Percentage Lease – the tenant is responsible for paying base rent on the property, as well as a monthly % of revenue earned from the business occupying the rented space. They are most often used in retail spaces and specifically malls.
In some cases the ‘Net’ charges are called CAMS. CAMS are Common Area Maintenance charges. In a neighborhood shopping center for example, there are lighting, paving, landscaping, irrigation and other expenses that the landlord must bear. Those total costs are either factored into the monthly lease payment, or billed when work is performed. If a business occupies 20% of the total leasable space, they might be responsible for 20% of the CAM charges. You might find a space offered at $1.20 per SF (square foot). After speaking to leasing agent you discover that the Triple Net or CAM charges are 22 Cents per SF, which raises the rent to $1.42 per SF. If you are considering a 5000 SF space, that increases the initial rent from $6000 to $7100 per month. As an individual considering a lease, you need to make sure you understand all the charges, whether triple, double or single net, and/or CAM charges.
From a business perspective, leasing allows you to retain all your cash for the business, and adds the flexibility to move the business once the lease expires. The other end of the spectrum is that buying your space allows you build equity. After all, everybody is buying real estate, renters are simply buying it for someone else.