Types and Benefits of Commercial Leases

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Types of commercial leases are:

  • Net Lease
  • Net, Net Lease
  • Triple Net or NNN 
  • Absolute Net Lease.  

 The tenant progressively pays more and more towards the building with these leases, including Common Area Maintenance (CAM) charges, insurance, property taxes, and event capital repairs.  You may be questioning why any tenant would pay so much.  With the tenant paying so much, you may also be asking what is left for the investor to pay?   

Commercial leases are very powerful and can be complex.  Tenants may sign a long-term lease with a desirable location and customize their space to suit their needs.  It could be costly for this tenant to relocate, so a long-term lease is desirable to both tenant and investor.  Tenants like this are valuable and often referred to as AAA tenants.  AAA tenants have strong balance sheets, good history, and sign a strong lease.  AAA tenants are very desirable to investors as they allow excellent investor security and suitable financing on future properties.  With these AAA tenants paying most expenses, if not all expenses on the property, the investor would only need to pay the mortgage and provide property management.   

Depending on the type of commercial property you are making offers on, you will need to know what to consider. There are many topics for you to perform as part of your due diligence.  Know what rate spaces are currently being rented for and compare that to market rates of similar spaces.  Also, consider what space is not available or rentable and what future space might be open.  You could soon learn that portions of square footage are included in the space. However, no rent is collected on them, such as hallways, balconies, atriums, elevator space, etc.  You will want to know your competition and determine their offering with the age of the building, the rent charged, what is included in rent, etc. 

Before deciding, you need to know the occupancy rate and price per square foot. Is the landlord offering rent incentives? Where can you find answers to all of your questions?  Interacting with commercial realtors and city/county officials is a great source for much of your information.  The city officials can be an excellent source to learn if there are any other new construction projects planned that could be a competitor to you at some time.  Be sure to know your traffic flows where your potential property is.  Properties such as retail and strip malls rely heavily on high traffic volumes to bring in revenues. 

Understand the market indicators to utilize the real estate cycle to determine when to buy and sell.  So many people want to enter the real estate market when the market is high. This is often referred to as a seller’s market.  Is a seller’s market the best time to get into real estate, perhaps provided you find properties that fit your goals and criteria?  True experts will get into areas before the area values rise.  Watching for increasing employment numbers, rent rates, and housing values are a few good indicators of an area’s potential growth. Some of the best property investors will tell you that being patient is crucial when acquiring a new property. When you buy properties with cash flow, that cash flow will help you be patient as you have positive cash flow, mortgage reduction, and profits from the beginning.  When the area starts to appreciate, you now have another source of profit.   

Sophisticated investors will know their monthly cash flow from the beginning of the deal, which we can control.  Appreciation is primarily out of our hands, unpredictable, and we indeed enjoy it when it happens!  

Sophisticated investors also can increase their cash flow by adding value to properties.  By adding value, we bring the value of property up, and this is called forced appreciation.  Depending on what your value-added includes, some of your benefits could be:

  • Higher rents
  • Highly quality tenants
  • Reduced expenses
  • Longer lease terms
  • Improving your tenant mix 
  • Adding new revenue sources
  • Triple net leases (NNN)

These are just a few ways to better your investment, increase your NOI, and increase your profits.  You are starting to see commercial properties. There is so much more opportunity for forced appreciation and improving your investment than in residential investing.

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