Wealth Opportunities in Commercial Real Estate: Management, Financing, and Marketing of Investment Properties

Four Basic Types of Leases

Leases are contractual binding agreements between a landlord and a tenant. The lease document controls the rights and liabilities between the parties. Unless there is a reason to believe otherwise, the contractual rent and the other contractual obligations of the tenants should be used as the basis for analysis.

You must understand the nature or type of lease you are dealing with. The leases should be reviewed and summarized or briefed. A procedure should be established to process a lease once it is executed so that billing is accurately handled and lease administration is otherwise properly taken care of. See Chapter 10 for a more thorough discussion of this topic. It is important to clearly understand what the monthly/yearly base rent is, how much and when the rental adjustments are, and who bears the various operating cost burden as between the landlord and the tenant. These obligations will directly affect project cash flow and return.

There are, in general, four types of leases: the gross lease, the modified gross lease (or net lease), the triple net lease, and the bond lease. The main differences between these lease types concern which party will be responsible for the monetary obligations associated with the operation of the subject property and what, if any, obligations the tenant has regarding the mechanical systems, the roof, and the exterior walls of the project.

Gross Lease

In a gross lease, the operating expenses such as utilities, janitorial, ...