Net vs Gross Lease Part II

​Maintenance Responsibility
The maintenance of the property is always a hot button issue during lease negotiations. This presents an opportunity to understand the potential future liabilities that will be incurred during the term of the lease, and attempt to limit your exposure.  In a true Net, or triple net (NNN), lease the tenant is responsible for all maintenance to the property, including roof, structure and foundation.  In most Gross leases the tenant is responsible for all maintenance to the property except the structural integrity of the roof (not membrane), structure and foundation.  But as we indicated in Part I of this article, most leases are a hybrid variety where both landlords and tenants are looking for the other party to be responsible for specific maintenance items.  There are many compromises that can be agreed to.  The most important aspect for either party is to be clear on who is responsible for these items up front so that you can, as much as possible, understand  potential future liabilities. 

Marketing Standpoint
How much does advertising your property as Net or Gross affect your lease up time and vacancy?  One of my favorite answers for real estate questions is, ‘it depends.’  Much of this depends on the type of space you are marketing  and the audience, or most viable candidates for your space that you are trying to attract. Generally, tenants gravitate toward Gross leases when they are scanning a particular survey of available buildings because they perceive that as either easier or less expensive than a Net lease alternative; this is especially true for smaller regional companies.  Therefore, advertising your property on a gross basis may get you more looks at the space from potential tenants.  Conversely, on a Net lease offering, advertising the lower base rent may attract more eyeballs when scanning a list of options.  However, in both cases different prospects are going to be attracted to different things.  It is most important to know your strategy and desired outcome and to work with a listing team who can convey the message and offering of the property to the market in the most effective way.
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Best Performance
Most of the time when Landlords are negotiating a lease, they are not thinking about selling the property, so the impact  the terms of that lease may have on  future sales value are not always considered. An experienced industrial agent will be able to articulate this relationship for you.    Even while no sale of the property may be imminent, approaching the present lease negotiation and management of the property along the lines that you will be selling soon will result in positioning your property to increase operational performance and cash flow now, even if you do not end up selling the property.  This can be accomplished with either a Net or Gross lease structure,  but we must remember that it is the contents of the lease, and not the title, that help us get the property performing  at its optimal level. 
 
Please note that in both Part I and Part II of this article we covered only a few elements of the lease and the economic impacts thereof.  We want to take this opportunity to remind you that we are not attorneys, nor can we give legal advice.  We are always ready and willing to combine our real estate experience with the professional legal counsel of your attorney on any specific transaction. 
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Please call us any time if you or anyone you know could use our assistance regarding the evaluation or execution of an industrial real estate transaction.