Real Estate & Related Terms Explained: Sublet

You may have heard the term sublet or sublease before, as in “my friend is subletting their space”.  But do you know what that means?  This is an important topic as a Tenant or Landlord in commercial leasing and one that is rarely understood properly, until the situation arises…

What Exactly Is a Sublet?

A sublet occurs when a Tenant no longer needs their space or it no longer suits their needs, but still is responsible for the remainder of the term of the lease they signed. So, instead of letting the space sit dark while continuing to pay, they sublet the space to another Tenant. When some sort of arrangement is agreed to, a sublease agreement is signed by both parties.

How Does a Sublet Work?

After a sublease is signed, the sub-tenant starts to pay rent to the sub-landlord. The Tenant in turn continues to pay rent to the Landlord. Even though the sub-tenant is now occupying the space, the original Tenant is responsible for all the terms under the original lease.

What Else Should I Know About Subletting?

If a Tenant wants to sublet their space, they require a Landlord’s written approval. Landlord’s are not allowed to unreasonably refuse a request for a sublet. Usually your lease agreement will speak to the ability to sublet and any mechanisms that apply. Should you have any issues with subletting, contact your lawyer.

From a sub-tenant perspective, sometimes subleasing space comes with risk, as it doesn’t come with any renewal options. This can put you in a bind when your term runs out. Therefore, when we have strong Tenants considering a sublet space, often times the deal goes back to the Landlord for them to deal with directly (instead of on a sublet basis) on the space so that proper terms can be negotiated for the tenant and then a termination is negotiated between the Landlord and the existing Tenant.

With careful thought and planning, sublets can be pulled off without a hitch. Make sure to hire an experienced commercial realtor to guide you through the process towards a smooth transaction.

Real Estate & Related Terms Explained: Tenant Improvements

Continuing on in our series of explaining real estate and related terms, now that you understand the types of commercial leases we are going to touch on some terms you will often come across. Today we are going to be talking about a subject that many potential tenants find confusing: Tenant Improvements.

What are Tenant Improvements?

Tenant Improvements are alterations made to a commercial or industrial premises in order to customize it for the specific need of a tenant. Examples of Tenant Improvements would include walls, flooring, ceilings, lighting, kitchens, paint, etc. Many people in the industry use the short form "T.I.s" when referring to Tenant Improvements.

Who Pays for the Tenant Improvements?

Every situation is different and often it depends on what you are able to negotiate. On one end of the spectrum the Tenant pays for all their own tenant improvements. On the other end the Landlord pays for all the Tenant Improvements (often referred to as a “turn-key”). Often they meet somewhere in the middle. Landlords will sometimes quote a base rent that includes a Tenant improvement allowance built in when leasing over a long term ($15/ft base rent, includes a $25/ft Tenant Improvements allowance on a 10 year term).

What Else Should I Know About Tenant Improvements?

Often times as a Tenant you can make your best deal taking the space as-is and pay for the Tenant improvements yourself. This better deal can result in lower rent over the long term and generous rent free periods at the beginning of the lease. On the flip side, it's possible as a Tenant that you don’t have the capital to fund all your own Tenant improvements or don’t have the time or skill to manage the project.

As a Landlord, there are also pros and cons to participating in the cost of Tenant Improvements. The pros include you can usually command a higher rent and longer terms. This can make your rent roll look good and increase the potential sale price should you plan to sell in the near future. The cons are obviously that you need to come up with the capital and also that you need to be sure to qualify the Tenant and their creditworthiness. Essentially, you're loaning them the money for Tenant Improvements that you will recoup over the term of the lease.

With the cost of construction increasing all over the place, it's important to factor in Tenant Improvement costs and who will be responsible for paying what. A knowledgeable commercial real estate specialist should be able to educate you on the dynamics of your market and how best to position yourself.

Real Estate & Related Terms Explained: Gross Lease

 As we continue on in our series of explaining real estate related terms, the streak of leasing-related topics continues. Over the last few weeks we have discussed triple net leasing and some related terms. Today we are going to touch on the opposite end of the spectrum when it comes to leasing… gross leasing.

What Is A Gross Lease?

A gross lease is a type of lease where the Landlord pays for the building’s operating costs, including the property taxes, insurance, maintenance, etc. From the Tenant’s perspective this equates to a flat fee or monthly rent in exchange for using the space. This is the opposite of how a triple net lease is administered, where the Tenant pays their proportionate share of the building’s operating cost.

How Is A Gross Lease Administered?

A gross lease is either administered as $/ft figure (ie $10.00/ft), or as a flat dollar amount per month ($2000/Month). Obviously from a Tenant’s perspective, a gross lease is simpler as the cost every month is fixed. Naturally, some Tenants prefer this type of lease arrangement, compared to triple net leasing.

What Else Should I Know About Gross Leasing?

Gross leases can sometimes include utilities cost and sometimes they are separately metered. It is important to understand how utilities are charged in the gross lease deals you are looking at. As a Tenant in a gross lease building, even though you aren’t paying additional rent to cover your share of operating costs, you will want to also ensure that the maintenance of the property has been kept up (landscaping, snow removal, etc). This can be done with language speaking to this in your lease agreement.

Sometimes you will run across a building that is run somewhere between a net and gross lease arrangement. These can be referred to as semi-net or semi-gross leases with an adjustment for part of the operating cost (ie. property taxes or utilities). The Landlord will set up a gross lease, but charge you back for your share of utilities or property taxes. Your lease agreement should speak to any special arrangements like this.

On the Landlord side generally lenders and other investors won’t view investment properties with gross leases as favourably. As opposed to net leasing where the Landlord is collecting a net rent yearly, with gross leases the Landlord is responsible for the expenses. This can lead to variability in the net income of the property and therefore leads to a lower applicable cap rate (valuation) when selling or financing the property.

Now you know the difference between a gross and a net lease. If any of these concepts are still confusing for you, feel free to drop us a line. We are here to help!

Real Estate & Related Terms Explained: Triple Net

Considering we do lots of commercial leasing, we come across triple net leasing every day. Very often we hear from potential tenants the same question: what does triple net mean? Today we are going to explain triple net leasing, so the next time you lease commercial space you’ll be able to understand your lease obligations.

What is a Triple Net Lease?

The technical definition of triple net leasing goes like this: a lease arrangement in which the tenant is responsible for paying in addition to their base rent all of operating expenses of the property. This includes property taxes, insurance and maintenance. Basically, you pay a base rent (or net rent as it is sometimes called) to the landlord, and you also pay your proportionate share of the operating costs of the property. So that the landlord is not out of pocket for any of the operating costs of the plaza, the tenant pays their share as they would if they owned the property. Typical operating cost items can include all of the following: property taxes, insurance, maintenance, repairs, common utilities, snow removal, landscaping, property management and janitorial (in some cases).

How is a Triple Net Lease Administered?

To use a plaza with multiple tenants as an example, the landlord will come up with a budget for operating costs (typically referred to as an operating cost budget), that sets out the yearly costs of operating the property, including the typical items mentioned above. They usually take that total and divide it by the total square footage of the property to come up with $/sqft amount (ie $100,000 operating cost budget, divided by 10,000’ in the plaza, equates to $10.00/sqft for operating costs).  This operating cost amount is then added to your base rent to get to your gross rent (ie base rent of $15.00/ft plus $10.00/ft operating costs equals $25.00/ft). You multiply this amount by your square footage and this gives you your total annual rent. Divide that by 12 and that will give you your monthly rent. By doing the operating costs this way, it smoothes out the costs over the year for the tenant, instead of giving them lump sum bills as they come up. Essentially the landlord pays the operating costs and then charges them back to the tenant throughout the year. In the case where you are leasing an entire building, this can be simpler and the tenant can pay the operating costs directly themselves as there isn’t a proportionate amount to share with other tenants.

What Else Should I Know About Triple Net Leasing?

By year's end, the landlord should reconcile the actual operating costs in relation to what was budgeted. At that point they will most likely either owe you a balance if the actual comes in less than the budgeted, or you owe them if the actual comes higher than budgeted. Some of the volatile operating expenses that can swing year to year include snow removal, common utilities and repairs/maintenance.

All triple net leases are slightly different in the way they are administered, but this gives you a basic understanding of the concept of triple net and what you should know.