Commercial Property Q&A: What’s the Difference between Leasing and Renting?
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Bonus information: when we say we rented a car, we are saying we paid for the use of another’s car – which, by the way, we leased short term through a rental agreement. Rental agreements typically cover very short term uses or occupancies. Leases typically deal with longer term occupancies. Again, rent is what we pay.
A tenant in a lease typically pays for a number of different costs: • The base rent of the space itself • The taxes on that space • The cost to insure that space against losses from fire, damage, etc. • The common area maintenance (CAM) costs of the property, including lawn trimming, snow removal, raking leaves, repairing sprinklers, etc.,• The management of the property • Occasionally tenants are asked to pay for ‘Systems Replacement’ costs for asphalt parking lot, roof replacements, 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. • And possibly 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. Accordingly, most leases are set up with an estimate of all the costs outside the base rent that are billed to the tenant monthly, based on estimated costs from prior years of building operations and projections moving forward. That accumulation of costs extra 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. Any adjustments in amounts due or overcharges are brought forward into the next fiscal year’s triple net accounting.
Are you asking yourself, “Why in the world would I pay all of that? I want a gross lease where I just pay one price and I’m done”? There’s a lease for that. Gross leases are leases that include the base rent plus the triple net costs all rolled into one. Smaller properties with shorter term tenants sometimes use gross leases to make things easier. But you should know that since a gross lease provides the landlord no avenue to recover any cost overruns in bills they cannot control – i.e. taxes, insurance, etc. – be aware of the possibility of a savvy landlord adding some cushion into his cost estimates to cover any possible overruns.
Triple net (NNN) leases charge tenants only dollar for dollar for landlord costs to own and run the building and are all presented for the tenant’s review. There is not and should not 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 in a gross lease. In all cases, tenants ultimately pay the base rent and all the other costs. And that is precisely why having an experienced agent on your side is so valuable during the lease process.
Learn more about the lease process with our free 13-Step Lease Process guide.