Types of Commercial Leases

Leases on commercial properties fall into three main categories - triple net, gross and full service.

Triple net or NNN leases refer to the fact that the tenant pays its proportinate share of the landlord's expenses. The expenses are: (1) property taxes, (2) insurance and (3) common area maintenance (CAM), which may include landscaping, cleaning, parking lot sweeping or plowing, and utilities for commom areas. In a multi-tenant building, the costs are divided among the tenants based on the proportion of the total space the tenant occupies.

A gross lease is one in which the tenant pays just the rent and does not pick up landlord's costs.

A full service lease is one in which the tenant's rent covers the utilities that the tenant uses and often includes janitorial service. The tenant does not pay any of the landlord's expenses.

Leases frequently fall into variations of these three main types. For example, the lease might call for the tenant to pay a share of the CAM charges but not taxes or insurance. Or a full service lease may exclude janitorial services. These variations are why leases are sometimes called modified gross or modified full service or double net instead of triple net.

With the exception of full service leases, the tenant always pays for its own utilities. Also, in every cas the tenant always provides its own liability insurance and insurance on its personal property.

Because there are so many variations, it is always a good idea to check exactly what charges the tenant is expected to pay.

To see the properties we have for lease or for sale, please check our web site at www.modesto-commercial.com To contact me please email at rlroaks@prucommercialre.com or call 209-758-3147.

Thank you for looking at our blog.

CAP RATE - INVESTMENT PROPERTY TERMS

For those who are new to investment real estate, there are some terms that are helpful to be familiar with. One that comes up often when describing the value of a property is the term "CAP rate", which is shorthand for "capitalization rate".

Although it is a fairly easy concept and quite easy to calculate, it provides a lot of information about the value of an investment property.

The definition of CAP rate is annual net operating income (NOI) divided by the price paid for the property. NOI is the income generated by the property less expenses. (Expenses such as income taxes and depreciation are not deducted.)

An investment property generates rental income and may have expenses such as property taxes, insurance and maintenance of the building and grounds.

As an example, a property might generate $4,000 per month in rent which is $48,000 annually. If property taxes are $6,000, insurance is $2,500 and maintenance is $4,000, the annual net operating income is $36,500. If the price of the property is $562,000, the CAP rate would be 6.3%.

Another way to approach the CAP rate issue is to start with the annual NOI and divide by the desired CAP rate to get what would be a reasonable price. So if the annual NOI is known, for example $36,500, and you want a 7% CAP rate, the price you would be willing to pay would be $521,400 which is $36,500 divided by .07.

Of course, CAP rates are based upon martket conditions. Everyone would like to have a 10% CAP rate, but that is not where the market is at right now. Rather, investment properties are selling in the 6% to 7% range, depending upon the quality of the property and the quality of the tenant.

General summary - CAP rate is annual NOI divided by price. For any given property, the higher the CAP rate the lower the price and vice versa. CAP rates are market driven, with the current market being in the 6% to 7% range.

For information about properties we have for sale or lease, please check our web site at www.modesto-commercial.com To contact me please email at rlroaks@prucommercialre.com or call 209-758-3147.

Thank you for looking at our blog.