Blog Series – Successful Lease Negotiations, part 2

Types of leases Leasing is a complex subject because there are so many different kinds of leases, and it is a field of law, which can change rapidly as market and general economic conditions require new approaches to addressing the parties’ rights and obligations in the transaction.

Most commercial leases are categorized according to whether the use is office, retail or industrial in character. Each lease category tends to have more of a focus on one area or another. For example, office leases typically include services provided by the landlord, including janitorial services, maintenance, repair and operation of building systems, elevators, utilities, air conditioning and security. Industrial leases usually involve few services, except maintenance and repair of any shared parking or landscaping for a multi-tenant project. Retail leases are generally similar to industrial leases, but they include operational concerns particular to the retail context, including use restrictions, signage and site plan issues. There are also considerable differences between multi-tenant and single tenant projects, and the structure of any lease will be highly influenced by whether the property involved is leased to a single tenant or is part of a larger project.

A “gross lease” is one that involves payment of a fixed rental amount without any additional charges for taxes, insurance, utilities, or other charges. True gross leases are typically used only for short-term tenancies of relatively small lease areas. A “modified gross lease” is one in which some, but not all, operating costs of the property may be passed through to the tenant, in addition to base rent. In some forms of modified gross leases, the charges that may be passed through are taxes or other expenses of the property only to the extent that they exceed an “expense stop” or “base year amount.” Modified gross leases often are also “full service leases,” because the landlord directly provides all janitorial and utility services to the leased space. Further, a “net lease” (also called “triple net”) requires the tenant to pay, in addition to base rent, the tenant’s proportionate share of all utilities, insurance premiums, real property taxes, and maintenance and repair expenses for the property.

Further, specialized leases have evolved to serve financing functions, including ground leases (separate ownership of land from building), sale/leaseback transactions (shifting risks and benefits of ownership to a third party), build-to-suit leases (capital for building construction designed by tenant supplied by landlord), synthetic leases (operating lease for financial accounting reporting purposes and a secured loan for all other) and securitized leases (structured and packaged so income stream can be sold to third party investors through the securities market, often as a pool of leases).

It is important to fully understand the type of lease transaction being negotiated, regardless of what it’s called, in order to effectively negotiate the deal.