Twelve Key Economic Ingredients in a Lease

The following 12 provisions should be understood to properly grasp the economics of a lease transaction:

  1. 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.
  2. 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, ...

Get Wealth Opportunities in Commercial Real Estate: Management, Financing, and Marketing of Investment Properties now with O’Reilly online learning.

O’Reilly members experience live online training, plus books, videos, and digital content from 200+ publishers.