Twelve Key Economic Ingredients in a Lease
The following 12 provisions should be understood to properly grasp the economics of a lease transaction:
- Type of Lease: Is the lease a gross, modified gross, triple net, or bond lease? An understanding of the lease type will shed light on which party bears the cost burden and/or the responsibility for various operating services. Please refer to Chapter 3 for an explanation of the differences among the provisions typically contained in these various lease types.
- The Parties/Liability: Is the tenant signing individually or is another legal entity executing as the tenant? Often this issue arises when a potential tenant is asked who is going to be the obligor on the lease and the response is “Smith's Bakery.” Most likely “Smith's Bakery” is a fictitious business name for the bakery company. John Smith is doing business as (dba) “Smith's Bakery.” In this event, John is conducting business as a sole proprietorship and refers to his business as “Smith's Bakery,” but “Smith's Bakery” is not a legal entity. Legal entities other than an individual include a corporation, a partnership, and a limited liability company, but not a “dba.” Further inquiry into the organizational documentation surrounding John's business should reveal who is the real owner of the business. Asking John to submit his certificate of formation and/or tax returns should help to clarify the issue of how title is held.
If an entity, as opposed to an individual, is the tenant, ...