Understanding Industrial Leases, Both Gross & Net
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This article was updated on 10/17/23.
Exploring warehouse space for rent means looking at not just the spaces available, but the terms that are connected to each space.
To get started, let's move to the topic of gross and net industrial leases. These are very similar to the commercial property leases you're more familiar with, but they do vary a bit more than it seems at first glance.
What's Unique About an Industrial Gross Lease?
Here's what you need to know about the industrial gross lease, a different animal compared to other commercial leases:
- No utilities: The industrial gross lease doesn't demand the tenant add utilities to their monthly expenses.
- Janitorial services are handled: Instead of having the tenant pay for janitorial services, the owner takes care of this expense.
- Customizable: The services covered by the owner and what's covered by the tenant are customizable, and everything is negotiable.
- Better in some deals than a triple-net lease: The triple-net lease would require tenants to shoulder most of the costs of running the building, which may not work well for some business models.
For many, the industrial gross lease is seen as the perfect middle-ground between the double-net lease and the triple-net lease, where more costs are passed on to the tenant than the owner.
#1 – The Double-Net Lease
Hunting for warehouse space for rent? You've probably run into plenty of listings that are double-net leases. They're pretty common, but here are a few points you should know:
- The tenant is agreeing to pay more than just rent, including taxes and insurance premiums.
- Instead of making several payments to different parties, tenants would send the money directly to the landlord.
- The landlord is still responsible for sending those payments for property taxes and insurance premiums.
- The lease will spell out all payments, their due dates, and where to send the payments.
The double-net lease is also referred to as an "NN" lease, and you'll see both terms used interchangeably.
#2 – The Single-Net Lease
As you probably know, there's a wide spectrum between the absolute net lease and the absolute gross lease. When it comes to finding warehouse space for rent, you might see a few listings that advise they are under single-net leases. What does that mean?
It means that the tenant is responsible for not just rent but also property taxes on the property. This isn't that common in the warehouse world, but other properties do have single-net leasing.
How to Structure an Industrial Gross Lease
When it comes to building a great industrial gross lease, it's important to remember that the power is in the structure. Indeed, it's critical for investors and landlords to set up the lease properly so that they can still pursue financing long-term. Here are a few points to consider:
- Maintenance costs can become larger over time as the building requires more repairs. Describe exactly what the tenant will pay and what the landlord will pay.
- Ensure that the tenant initials next to clauses about increases and caps, so they cannot declare that they were not made aware of the increases.
- Be upfront with what the costs of maintenance and improvements are, so that when you go for financing you can show the lender exactly how much money is truly coming in.
Being clear about your lease is the best way to attract great tenants and keep them long-term. These long-term tenants bring great cash flow and increase the amount of money that you can ask for in terms of financing for other projects.
Industrial Gross Lease Negotiation Strategies
Coming to the world of commercial real estate can have some pleasant surprises for residential real estate investors. Indeed, the need for negotiation is much higher in the commercial world, and property owners are used to those seeking the best deal possible. That's different than residential real estate where the room for negotiation is quite small; after all, there's always someone else looking for a home.
Businesses understand that a deal has to make sense for both parties. The property owner wants someone who will stay for a long time, and the tenant wants the best location for the money so they can operate a successful business.
Cash flow is everything for both parties, so there are a few more points to consider when considering industrial gross lease negotiation strategies.#1 – For Tenants
Tenants must ensure they look over the lease carefully. The lease will outline exactly what expenses they are responsible for. For example, an industrial gross lease could advise that outside maintenance of the building is for the tenant to handle. Yet if you're in an area with extreme weather, this cost could add up over the lease.
Why not point this out to the owner and strike a better compromise?
Remember that the owner of the property is looking for someone who will stay for a long time. It is quite possible to negotiate for more services covered by your lease payment in exchange for a longer lease term. The owner can count on the lease payments as part of their monthly cash flow, so they are very willing to negotiate.
#2 – For Investors
Investors looking for a long-term tenant have a great spot to negotiate from, but it is also important not to get too heavy-handed. Indeed, the commercial real estate market still obeys the laws of supply and demand. If the terms of the lease are too strict, the tenant will look elsewhere.
It's a great idea to begin the conversation by asking the tenant to openly describe what they're looking for. Are they concerned about high rent or having to track a bunch of expenses? You could negotiate taking care of things that they find a hassle, like snow removal or janitorial services.
This also protects your investment: The services that they don't care to do can end up being done poorly, which is the last thing you want for your building.
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