Learn How Changing Your Lease Structure Will Increase Your Profits

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.

Many savvy commercial property owners and investors have begun to restructure their leasing agreements with their tenants. Instead of using a full service lease, a lease in which the owner pays all operating expenses, including taxes, insurance and utilities, they have switched to net-net leases, and even net-net-net, or triple net leases. This new structure have allowed for a great decrease in operating expenses, and allows more overall profit to be generated from the property.

The net lease is one in which the tenant pays for two operating expenses, taxes and insurance, leaving the utilities for the owner to pay. However, it became obvious to owners that if the tenants are using the utilities, they should pay for them.

Owners began to adopt the triple net lease where the tenants pay for taxes, insurance and utilities, basically the three most important items of operating expenses. Owners began to see an increase in their net operating income, which is often the true evaluator of how well a property is performing and its overall value.

The owners simply put a clause in the contracts stating that the tenants will pay for the operating expenses which will be divided on a pro-rata share, based on square footage usage. The larger the unit, more is paid. The owner does not have to pay any extra bills or undergo any additional expenses when the tenants are paying for the services they are directly using. The owner simply has to collect a rent check every month, without watching half of it go to bills.

What exactly is a contract?

By definition, a contract is an agreement between two or more parties to do, …..

It may be time to update your old contracts and change the way your property operates. The risk is very limited, compared to the amount of money you will save every month when utilizing a triple net lease, as opposed to a full service or net lease.

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