Industrial Property Q&A: What Makes Leasing Different From Renting?
When you sign a lease, you’re entering into a binding two-party contract in which one party conveys land, property, services, etc., to the other 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. Renting refers to the payments of money made in consideration of using the property. To summarize, we lease a property and we pay for it with rent.
Here’s an example to clarify. When we tell someone we rented a car, we’re really saying that we paid for the use of another’s car that 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. And again, the rent is what we pay.
A tenant in a commercial or industrial lease typically pays for quite a few different costs:
The base rent and taxes on the space
The cost to insure that space against potential losses from fire, damage, etc.
The property’s common area maintenance (CAM) costs, which may include lawn trimming, snow removal, raking leaves, repairing sprinklers, etc.,
The property management
Tenants are sometimes asked to pay for systems replacement costs for asphalt parking lot or roof and HVAC equipment replacement. These types of building systems generally have a specific useful lifetime of which the tenant consumes a portion during their occupancy of the property.
A landlord only controls 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. This is based on estimated costs from prior years of building operations and projections moving forward. That accumulation of costs separate from the base rent is 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 charged the tenant. Any adjustments in amounts due or overcharges are then brought forward into the next fiscal year’s triple net accounting.
If you’re wondering why someone would pay that instead of negotiating a gross lease with one price, well, there’s a lease for that too. Gross leases are leases that include the base rent plus the triple net costs rolled into one. Smaller properties with shorter term tenants occasionally use gross leases to make things easy. But be clear that because a gross lease provides the landlord no avenue to recover any cost overruns in bills they cannot control – such as taxes, insurance, etc. – the savvy landlord may add some cushion into his cost estimates to cover any possible overruns.
While triple net (NNN) leases charge tenants dollar for dollar for landlord costs to own and run the building – and are all presented for the tenant’s review – gross leases may add some charge, but tenants won’t get a year-end review. Still, in all cases, tenants ultimately pay the base rent and all the other costs. That’s why it’s such a valuable asset to have an experienced agent on your side during the lease process.
You can learn more about the lease process with our free 13-Step Lease Process guide.