Negotiating Retail Lease Terms – Base Rate, Lease Indexing, CAM, NNN, Personal Guaranty, Lease AssignmentFollow @justelementary
When it comes to negotiating a retail lease, it is important to consider all of the terms and the entire lease. In this blog post, we will focus on a few of Lease Terms that are important to negotiate
- The Base Rate in Gross Lease Versus a Net Lease
- NNN & CAM Charges
- Lease Indexing: Fixed versus Variable
- Personal Guaranty Clause
- Lease Assignment Clause
Here is a presentation by Commercial Business Broker Pramod Patel discussing the terms listed above.
First we’ll discuss the difference between a Gross Lease and Net Lease. In simple terms, a Gross Lease is a situation where there is one flat fee for the rent, no extra charges. A Net Lease is a situation where the tenant pays a base rent, and then pays an additional charge to reimburse the property owner for Property Tax, Property Insurance and Maintenance Costs. While a Gross Lease sounds better, it is important to keep in mind, that a Gross Lease might already factor those additional charges, and perhaps overestimate those charges. Also keep in mind that most Retail Properties are leased with Net Leases to facilitate their trading on the resale investment market.
The important takeaway here is to make sure to negotiate the fair base rate in either case of a Gross Lease or a Net Lease. The main way to accomplish this is to do a survey of recently written leases in the immediate area as well as in comparable properties in same market.
Next, let’s discuss NNN & CAM Charges. What exactly are they? You can read this previous post about NNN/CAM charges for deeper explanation. In summary, NNN stands for three things, hence, the three letter Ns. These three items are the following:
- Property Tax
- Property Insurance
- Property Maintenance including Management expenses
If your lease calls for the payment of all three of the items listed above, then you have a Triple Net Lease (NNN). If your lease only calls for only or two of the above items to be paid, then you are dealing with a Partial Net Lease.
Moving on to Lease Indexing. Lease Indexing is simply the rate and schedule upon which the lease payments are scheduled to be adjusted, most often in increases. There are two types of indexing, Fixed and Variable. There is no right or wrong answer for which one is the best for you to negotiate. Fixed increases are typically scheduled to happen annually. Ideally, you would like to negotiate the smallest percentage increase in the lease payments, so getting 2% increases is nice, however, expect landlord to push for up to 5% annual increases. Variable increases are pinned upon some factor, such as regional CPI rates. CPI has historically varied, and while it may be low at the time that you are negotiating, bear in mind that inflationary factors can skyrocket quickly. As such, opting for fixed lease indexing gives you the ability to budget for the future with known numbers.
With Retail Leases, be aware that in most situations lessors will ask for a Personal Guaranty. What this means is that you are pledging your personal assets to perform during the life of the lease. So for example, if your business goes under, then you would still be required to make lease payments provided you have personal assets such as equity in your home and personal bank accounts. This will still usually apply even if you negotiate the lease on behalf of the corporation that you use to own and operate your business. In the retail leasing world Personal Guaranty are almost always a must, so what you should be prepared to do is to negotiate the gradual removal of the Personal Guaranty over time given full performance on the lease. Also negotiate that the Personal Guaranty is removed upon Assignment of the Lease.
This brings us to the last topic of the post regarding commercial retail leases, and that is the assignment clause. There may come a time when you need to Sell your business. In those cases you want to make sure that you have negotiated a good Lease Assignment clause. Things to watch out for in the Assignment Clause is that consent to the Assignment will not be unreasonably withheld by the lessor. Also, watch for Assignment Fees. You want to make sure that the Assignment is a reasonable amount for the time and expenditure a lessor will occur in processing your request. Some landlords attempt to negotiate assignment clauses where they get a significant share of selling price of the business, such as 50%!!!. So read carefully for that. Also, as referenced above negotiate the clause so that your Personal Guaranty expires upon assignment of the lease.
For More information on how Just Elementary, Inc, Business Brokers can help you with Negotiating Your Retail Commercial Lease for your business contact our Client Care Manager Sonia Chhabra at (888) 926-9193 or email firstname.lastname@example.org