Signing a Lease vs. Renting
A lease is a binding two-party contract in which one party conveys land, property, services, etc., to another party for a specified time, usually in return for a series of specified periodic payments. Leasing is a reference to the act of contracting to occupy space or land from someone else.
Renting refers to the payments of money made in consideration of using the property. So we lease a property and we pay for it with rent.
Let’s clarify with an example. When we tell someone we rented a car, we’re saying that we paid for the use of another’s car that we leased for a short period of time through a rental agreement. Rental agreements usually cover very short-term uses or occupancies. Leases tend to deal with longer-term occupancies, and the rent is what we pay.
A tenant in a commercial or industrial lease usually pays for a variety of costs:
- Base rent and taxes
- Insurances costs against potential losses from fire, damage, etc.
- Common area maintenance (CAM) costs, which can include lawn trimming, snow removal, raking leaves, repairing sprinklers, etc.
- Property management
Additionally, tenants are sometimes asked to pay replacement costs for things like asphalt 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.
While a landlord controls the base rent and a few of the common area maintenance items, all other costs are virtually uncontrollable by the landlord. For this reason, most leases are created with an estimate of all costs outside the base rent that are billed to the tenant every month. This estimate is based on projected costs from prior years of building operations and 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 add up all of their actual costs and compare that amount against how much they have actually charged the tenant. Adjustments in overcharges or amounts due are then brought forward into triple net accounting for the coming fiscal year.
If you’re wondering why someone would pay this instead of negotiating a gross lease with one price, there’s actually a lease for that too. Gross leases include the base rent plus the triple net costs, all rolled into one. Smaller properties with shorter-term tenants occasionally use gross leases just to keep things simple. But because a gross lease gives the landlord no avenue to recover any cost overruns in bills they cannot control – taxes, insurance, etc. – the savvy landlord will often 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. Gross leases, on the other hand, may add some charge, but tenants won’t get a year-end review. No matter which lease they have, tenants will still end up paying the base rent and all the other costs. That’s why it’s so important to have an experienced agent on your side during the lease process.