The Lease Structure That Generates the Most Cash for Your Commercial Property

The Lease Structure That Generates the Most Cash for Your Commercial Property

Commercial properties are characterized through income generated by rents paid by tenants. These commercial properties can be apartment complexes, office buildings, strip malls, retail centers and medical buildings.

The more income a commercial property can produce, the more valuable it is. The true qualifying factor is the net operating income, or NOI, which is income minus operating expenses. Operating expenses include any expense that relates to the actual operations of the property. These can include taxes, utilities, maintenance, and management costs.

It used to be common for the owner to pay the property's taxes, insurance, and utilities under a full service lease. The tenant would simply pay the rent every month, and the owner would pay the bills. This greatly cut into overall profits, as the owner was using rent income to pay the additional bills.

Savvy commercial property owners and investors soon came to realize that if the tenants are using the property, then they should have to pay for the expenses of keeping it in operation. After all, who is using the water, electricity, trash services and common areas? Not the owner, but the tenant.

Net leases became popular, instead of the full service lease, which required the lessee to pay only the taxes and insurance. The lessor would be responsible for utilities and other related operating expenses. This change in lease structure allowed more profit to stay in the hands of the owner.

Even still, owners took the lease structure one step further. In recent years, and even recent months, both young and old properties are being changed to net-net-net leases, or the triple net lease, where the lessee (tenant) is responsible for paying three of the most important operating expenses: taxes, insurance, and utilities. A true triple net lease is one in which the lessee pays all of the operating expenses, and the lessor simply receives a rent check every month.

This structure of leasing has become very popular, and many commercial properties are making the switch because it greatly decreases the overall expenses, net operating income, and make the property higher performing and extremely more valuable. The lessors may not be happy, as they are now required to pay for the entire property, as opposed to just their living space.

So how does the lessor know how much each lessee must pay? Besides separating the utilities and having each unit's tenant be responsible for that which he or she uses, the common expenses are divided among all the units according to the total square footage of living space. The larger the unit leased, the more they pay.

In order to put this triple net lease structure into place, and see your income drastically increase, simply put a clause in the contract that the lessee is to pay the operating expenses which will be divided on a pro-rata share, based on square footage usage. Under this lease, the tenant literally pays all common area maintenance which may include parking lot cleaning, parking lot's electric, the lawn care, pool maintenance, and all other utilities used by the project.

If you feel that your property could better perform by implementing a triple net lease structure, then speak to your lawyer or advisor about rewriting the contracts to include the triple net lease clause. Watch your expenses drastically decrease, and you income rise quickly.

Tony Seruga, Yolanda Seruga and Yolanda Bishop of http://www.maverickrei.com specialize in commercial and investment real estate. As of May, 2006, they and their partners are managing over $600 million dollars worth of new projects.

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