As a property owner, it’s important to be aware of lease terms that can potentially hurt your revenue in the long term. In a multi-tenanted building with common area spaces, account for the shared spaces through a load factor (find out how to calculate load factor step-by-step here). The leasable square footage should take into account any storage areas/maintenance closets and any other shared spaces throughout the building.
Don’t forget to apply leasable square footage to both the base rent and any NNN cost to ensure you’ve accounted for space occupied by tenants. It is best practice to line out each of these factors in your lease to avoid conflict down the line.
In a gross lease, outline increases in building operating expenses – such as property taxes. While annual escalations can assist in the rise in operating expenses, in some years increases in property taxes have outpaced annual escalations, resulting in higher than accounted-for expenses.
Alternatively, consider using NNN leases, which outline the responsibilities of both the landlord and tenant for expenses such as property taxes, insurance, and maintenance. As property taxes, insurance, and maintenance increase, so will the additional costs charged through NNN.
Another important factor to consider is inflation. Failing to include escalations in your lease agreements means you may not be able to keep up with the rising costs of operating your property. Make sure to include provisions for inflation in your leases to ensure your rents maintain a fair market value.
Additionally, be careful about granting rights of first refusal to tenants. While this can provide security for the tenant, it can also limit your ability to choose the best fit for your property.
Options to buy can also be problematic for landlords. Including an option to buy in your lease agreements limits the marketability of your property when it comes time to sell. Instead, consider limiting the number of options to renew, and make sure to evaluate terms lengths to correspond with your investment strategies.
In all cases, landlords should be confident in their lease terms before signing. Want to audit your lease? Contact Kara Hogan for more information.