Andrew B. Zezas, SIOR
Relationship Manager,
Strategist, President
(908) 245-5999 x11
andrew.zezas@realstrat.com

Gross and net rents offer different operating and cost management structures to both tenants and landlords. In recent years, tenants and landlords have moved these two methods of calculating operating costs closer to each other, taking various components of each and blending them together to form hybrids. However, whether in traditional or modified form, net and gross leases, and their corresponding rental arrangements, contain real differences that can, and will impact, the cost and profitabilities of both tenants and landlords.

Net Leases

• Contain an occupancy cost structure where operating expenses, real estate taxes, utilities, and other costs, are charged to the tenant as additional costs, over and above the base rent.

• Traditionally used for industrial (warehouse, distribution manufacturing), flex, r&d, technology, retail, and single story office buildings. Net leases are also used for large single-tenant office leases. In the last decade, net leases have become more prevalent in new high-end, multi-tenant office buildings.

• Most often provide little or no cost increase protection to the tenant. Cost increases occurring on day-one of a net lease become the tenant's responsibility.

• In single-tenant situations, the tenant may secure rights to maintain greater cost controls in comparison to gross lease situations.

• In landlord managed net leased properties and those where the landlord is responsible for the costs to maintain the building's roof and structure, net leases may include a formula for operating expenses that the landlord may not pass on to the tenant.

• In landlord managed net leased properties, the landlord can generate profits by providing services.

• Single-tenant net leased properties often require less landlord administration, especially when the tenant takes on property management responsibilities.

• In single-tenant net leased properties, operating expenses should be lower when a qualified tenant takes on property management responsibilities. However, the tenant could realize additional costs associated with its own property management inefficiencies and resulting from providing its own administrative and cost management services.

• Net leases take varying forms, based on local market traditions. Sometimes called "Triple Net" or "Net, Net, Net" leases, or by other names, these arrangements can vary in their structure and their financial impact on the tenant.

No single operating cost structure will offer every company the correct solution. The right solution depends on many moving parts, including the operational and real estate needs of the tenant-occupant, the tenant's ability and inclination to self-manage property, the type of property, local market economics, negotiation outcomes, and more.

As they say, the devil is in the details. A thorough analysis of the tenant's operational and real estate needs prior to considering any property should properly set the baseline against which alternative operating cost structures can be compared. Armed with accurate data, and a team of skilled and knowledgeable negotiators, the tenant should be well positioned to achieve an operating cost structure that best supports its business objectives.

Andrew B. Zezas, SIOR, is Relationship Manager, Strategist, and President & CEO of Real Estate Strategies Corporation, Publisher of "Business, Profits and Strategy", a monthly online publication read by thousands of business, financial, and real estate executives nationally, and, is the author of two new real estate books, The CFO's Guide to Understanding Corporate Real Estate Transactions and The CFO's Guide to Hiring the "Right" Real Estate Service Provider, both of which will be available shortly at www.thecfosguide.com.

Mr. Zezas is well-known for his ease and informative style of public speaking, and has given talks, presentations, and has lead educational programs for business, professional, government, and trade associations, including the Building Owners and Managers Association, American Management Association, the U.S. Postal Service, RealComm, Society of Industrial and Office Realtors (SIOR), and others. Andrew is National Chairman of the SIOR Tenant Representation Specialty Practice Board, and is a licensed real estate instructor in Texas and Indiana. He can be reached at 908 245 5999 or via email.

Real Estate Strategies Corporation, located in Kenilworth, New Jersey, and serving clients throughout the country, helps companies create and execute Business DRIVEN Real Estate Solutions...and Opportunities, faster and with less risk. Visit www.realstrat.com.

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