In the world of industrial real estate, properties are sold, purchased, or leased. Or are they rented? It’s a question we’re often asked here at Miller Industrial Properties in northern Nevada – what’s the difference between leasing and renting? Here’s what to know about the distinction.
Renting Industrial Space vs Leasing Industrial Space
A lease is a binding two-party contract with two parties – one is conveying land, property, services, etc., to the second party for a specified time, and typically in exchange for a series of specified periodic payments. Leasing, then, refers to the act of contracting to occupy space or land from another party. Rent refers to the payments themselves that are made in consideration of use of the property. In other words, a property is leased and then paid for with rent.
If you rent a car, you’re paying for the use of another’s car that you leased for a short period of time through a rental agreement. Rental agreements usually cover very short-term uses or occupancies, and the rent is what you pay. Leases usually mean longer-term occupancies, and again, rent is what you’ll pay for as part of the lease.
A tenant in a commercial or industrial lease usually pays for several different expenses:
- The property’s base rent and taxes
- The costs to insure the property against potential losses from things like fire, damage, etc.
- The property’s common area maintenance (CAM) costs – expenses like lawn trimming, snow removal, raking leaves, repairing sprinklers, etc.
- Property management
Tenants are sometimes asked to pay replacement costs for things like parking lot or roof and HVAC equipment upgrades. These types of building systems have specific lifetimes, and the tenant consumes a portion of that timeline during their occupancy of the property. Depending on where in that lifetime a tenant leases, they may be asked to cover some of those costs.
A landlord controls the base rent and a few of the common area maintenance items, but almost every other costs is virtually uncontrollable by the landlord. Most leases are created with this in mind, reflected in an estimate of all costs outside the base rent that are billed to the tenant every month. It’s an estimate based on projected costs from previous years of building operations as well as projections moving forward. These costs separate from the base rent are referred to as “triple net” costs. At the close of a fiscal year, landlords tally all of their actual costs and compare that amount against what they’ve actually charged the tenant. Overcharge or amounts due adjustments are then brought forward into triple net accounting for the coming fiscal year.