Leasing vs Renting
Leasing is the act of entering into a binding two-party contract in which one party conveys land, property, services, etc., to another party for a specified time, and usually in return for a series of specified periodic payments. Leasing, then, refers to the act of contracting to occupy space or land from someone else. Rent is a reference to the payments of money as consideration of using the property. Basically, a property is leased and then paid for with rent.
Here’s an example. When we rent a car, we pay for the use of another’s car, which we leased short-term through a rental agreement. Rental agreements typically cover very short-term uses or occupancies. Leases usually deal with longer-term occupancies. And again, rent is what we pay.
A tenant in a lease usually pays for a number of different expenses:
- The base rent of the property
- The taxes on that property
- The cost to insure the property against losses from fire, damage, etc.
- The common area maintenance (CAM) costs of the property, which can including lawn trimming, snow removal, raking leaves, repairing sprinklers, etc.,
- Property management
- Systems replacement costs for asphalt parking lot, roof replacements, and HVAC equipment replacement. These types of building systems have a certain useful life that the tenant consumes a portion of during their occupancy of the property, so they’re sometimes asked to cover these costs
- And occasionally things like special assessments on the property, etc.
The only costs a landlord controls are the base rent and a few of the common area maintenance items. All other costs are virtually uncontrollable by the landlord. That’s why most leases are set up with an estimate of all the costs outside the base rent that are billed to the tenant monthly, which are based on estimated costs from previous years of building operations and projections moving forward. That accumulation of costs above and beyond to base rent is referred to as “triple net” costs. At fiscal year end, landlords add up all of their actual costs and compare that amount against how much they have charged the tenant. Overcharges or any adjustments in amounts due are brought forward into the next fiscal year’s triple net accounting.
So why agree to a triple net lease if all you want is to pay just one price and be done? There’s a lease for that too. Gross leases are leases that include the base rent and the triple net costs, all rolled into one. They can be a good option for smaller properties with shorter-term tenants, who sometimes use gross leases to make things easier. But be aware that because a gross lease provides the landlord no resources for recovering any cost overruns in bills they cannot control – like taxes, insurance, etc. – he possibility exists that a savvy landlord could add some cushion into his cost estimates just to be safe.
Triple net (NNN) leases charge tenants dollar for dollar for landlord costs to own and run the building, and they’re all presented for the tenant’s review. There is not – nor should there be – any landlord profit in the NNN recovery of those costs. Gross leases may add some added charge, but tenants don’t get the year-end review. No matter what, tenants are ultimately responsible for paying the base rent and all the other costs. That’s why it’s so critical to have an experienced agent on your side during the lease process.
Learn more about the lease process with our free 13-Step Lease Process guide.
Have a question about commercial or industrial property? Ask in the comment section and we’ll write a post to answer your question.