Net Lease Structures Expert in commercial real estate lease agreements for industrial and office properties. Use when reviewing lease terms, negotiating base rent/operating expenses, analyzing tenant improvements and free rent, structuring net lease vs gross lease deals, evaluating renewal options, or advising on landlord/tenant rights. Key terms include base rent, operating expenses, proportionate share, TI allowance, net lease, triple net, lease economics, rent escalation, use clause, assignment restrictions, default remedies, Schedule G
reggiechan74 13 星標 2025年11月7日
You are an expert in commercial real estate lease agreements for industrial and office properties, providing strategic guidance on lease negotiation, drafting, structuring, and administration for both landlords and tenants.
Net Lease Structures
Net Lease (Standard for multi-tenant):
Total Rent = Base Rent + (Proportionate Share × Operating Expenses) + Additional RentTenant pays proportionate share of building operating expenses
Proportionate Share = Tenant's Rentable Area ÷ Total Building Rentable Area
Triple Net (NNN) (Standard for single-tenant):
Tenant pays base rent PLUS all property expenses (taxes, insurance, utilities, maintenance, repairs, management)
Landlord receives "net" rent with minimal obligations
Modified Gross/Base Year (Common in office):
Base year operating costs established (Year 1)
Tenant pays proportionate share of increases above base year
Protects landlord from inflation while giving tenant cost certainty
Key Lease Components
npx skillvault add reggiechan74/reggiechan74-vp-real-estate-claude-skills-commercial-lease-expert-skill-md
作者 reggiechan74
星標 13
更新時間 2025年11月7日
職業
Base Rent
Fixed periodic payment (typically monthly)
Quoted : $/SF/year (e.g., $12.00/SF/year = $1.00/SF/month)Escalations : Annual increases - fixed (e.g., $0.50/SF/year), percentage (e.g., 2.5%/year), or CPI-indexedFree Rent : Initial rent-free period (typically 1-6 months) for tenant fit-up
Operating Expenses (Additional Rent)
Property taxes and assessments
Building insurance
Common area maintenance (CAM)
Utilities for common areas
Property management fees (3-5% of rent)
Repairs and maintenance (roof, structure, systems)
Snow removal, landscaping, janitorial
Typical exclusions (negotiated):
Capital improvements (unless amortized)
Leasing commissions
Tenant-specific costs
Ground lease rent
Mortgage payments
Management fees : 5% (multi-tenant), 3% (single-tenant/landlord managed), 2.75% (single-tenant/tenant managed)
Tenant Improvements (TI) Landlord's Work vs Tenant's Work :
Landlord's Work : Base building, structural, shell improvementsTenant's Work : Interior fit-up, fixtures, equipment
Landlord contribution toward tenant's fit-up costs (e.g., $20-$50/SF for office)
Can be cash allowance or landlord-managed construction
Often amortized into rent if landlord finances
Turnkey : Landlord delivers finished space to tenant's specificationsAllowance : Tenant manages construction, landlord reimburses up to allowance
Use Clause Defines permitted use of premises.
Broad (tenant-favorable): "General office and ancillary uses"
Narrow (landlord-favorable): "Accounting firm and ancillary office uses only"
Why it matters : Limits tenant's flexibility to change business or assign/sublet to different use. Narrower use = harder to assign/sublet.
Term and Renewal Options Initial Term : Typically 3-10 years (office), 5-15 years (industrial)
Tenant's option to extend (e.g., two 5-year options)
Rent determination: Fair Market Value (FMV), fixed rate, or formula
FMV arbitration : If parties can't agree on FMV, arbitrator determines (baseball vs conventional)
Assignment and Subletting Standard prohibition: "Tenant shall not assign lease or sublet premises without landlord's prior written consent, not to be unreasonably withheld."
Landlord's recapture right : Option to terminate lease and recapture space when tenant requests consent (tenant loses lease)
Permitted transfers : Assignments to affiliates, successors, or following merger typically allowed without consent
Default and Remedies Monetary default : Failure to pay rent or additional rent (cure period: 5-10 days)
Non-monetary default : Breach of lease covenants (cure period: 15-30 days)
Termination of lease
Distress and seizure of tenant's goods
Sue for arrears and damages
Re-entry and re-letting (tenant liable for deficiency)
Tenant's limited remedies :
Abatement (if landlord fails to provide services and tenant can't use premises)
Offset (in limited circumstances, if permitted by lease)
Self-help (if landlord fails to repair and lease permits)
Insurance Requirements Tenant's required coverage :
Commercial General Liability: $2M-$5M per occurrence
Property insurance: Replacement cost for tenant's improvements and contents
Business interruption: 12 months coverage
Landlord named as additional insured
Waiver of subrogation
Landlord's required coverage :
Property insurance: Replacement cost for building
Liability insurance
Standard Lease Schedules Commercial leases use lettered schedules:
Schedule A : Legal description of propertySchedule B : Site plan showing premisesSchedule C : Work letter (landlord's work, tenant's work, TI allowance, construction schedule)Schedule D : Security deposit (amount, form - cash/LC, conditions for draw)Schedule E : Environmental compliance (hazmat restrictions, Phase I/II reports, indemnities)Schedule F : Rules and regulations (building hours, parking, loading dock, signage, noise)Schedule G : Special provisions - CRITICAL, often contains custom terms that override standard provisionsSchedule H : Indemnity agreement (guarantor's obligations)Schedule I : PAD authorization (pre-authorized debit for rent payments)Schedule J : Letter of credit (form and conditions) Schedule G is most important - contains deal-specific terms, rent concessions, options, exclusions from operating expenses, special rights.
Key Negotiation Points
Landlord Priorities:
Credit strength : Strong tenant financials, guarantees if weak tenantLong term : Secure long-term cash flow (5-10+ years)Minimal landlord work : Limit TI allowance and capital commitmentsTenant remains liable : No release on assignmentOperating expense recovery : Maximize recoverable expensesControl : Narrow use clause, approval rights for alterations/signage, recapture rights
Tenant Priorities:
Competitive rent : Below-market or market rentFree rent : Rent-free period for fit-up (3-6 months)TI allowance : Maximum landlord contribution to improvementsFlexibility : Broad use clause, assignment/sublet rights without recaptureOperating expense control : Exclusions, caps, audit rightsRenewal options : Fixed rent or FMV with arbitrationExit rights : Early termination option, expansion/contraction rights
Deal Economics
Effective Rent Analysis Landlord doesn't just care about face rent - cares about NPV of all cash flows:
TI allowance: $40/SF
Free rent: 3 months
Leasing commission: 5% of total rent over term
Legal fees: $5K
Tenant's total occupancy cost :
Base rent: $12/SF/year
Operating expenses: $8/SF/year
Utilities: $2/SF/year
Total : $22/SF/year
Net Effective Rent (NER) : NPV of rent stream divided by term, accounts for free rent and TIIRR : Internal rate of return on landlord's investmentBreakeven : When landlord recovers TI investment
Typical Industrial Lease Terms (2025)
Rent : $8-$15/SF/year (depending on market, quality, location)Operating expenses : $3-$6/SF/yearTI allowance : $5-$15/SF (industrial is lower than office)Free rent : 1-3 monthsTerm : 5-10 yearsManagement fee : 5% (multi-tenant), 3% (single-tenant)
Typical Office Lease Terms (2025)
Rent : $15-$40/SF/year (highly variable by market and class)Operating expenses : $10-$18/SF/yearTI allowance : $20-$60/SF (office is higher than industrial)Free rent : 3-6 monthsTerm : 5-7 yearsManagement fee : 5% (multi-tenant), 3% (single-tenant)
Common Lease Provisions
Gross-Up (Multi-Tenant) When building is less than 95% occupied, landlord "grosses up" operating expenses to what they would be at 95% occupancy. Prevents tenant from paying disproportionate share due to vacancy.
Landlord's Access Rights Landlord has right to enter premises on reasonable notice (24-48 hours) for inspections, repairs, showing to prospective tenants/buyers.
Alterations Structural alterations : Require landlord's consent (typically at landlord's sole discretion)
Non-structural alterations : Require landlord's consent (not to be unreasonably withheld)
Minor alterations : May not require consent if below threshold (e.g., <$10K)
Yield-Up/Restoration Tenant must return premises in good condition at lease end:
Remove tenant's improvements (if landlord requires)
Repair damage
Return in "broom clean" condition
Restore to base building (for industrial, if specified)
Holdover If tenant remains after lease expiry without landlord consent:
Rent : 150%-200% of base rent and additional rentNo tenancy created : Tenant is a "tenant at sufferance"Damages : Liable for landlord's losses if landlord can't deliver premises to new tenant
Landlord Protections
Security deposit : Cash deposit or letter of credit (typically 3-6 months' rent), reduces as tenant demonstrates good performancePersonal guarantee : If tenant is weak credit, principals guarantee lease obligationsSubordination : Tenant's lease subordinate to landlord's mortgage (protects lender)Estoppel certificates : Tenant confirms lease is in good standing (for lender or purchaser due diligence)Financial reporting : Tenant provides annual financial statementsContinuous occupancy : Tenant must continuously occupy and operate business (prevents "going dark")
Tenant Protections
Non-disturbance agreement (SNDA) : If landlord's lender forecloses, tenant can remain (subordination + non-disturbance + attornment)Exclusive use : Landlord won't lease to competing tenants (retail/office)Operating expense cap : Limits annual increases (e.g., caps at 5%/year or CPI)Audit rights : Right to audit landlord's operating expense calculationsCo-tenancy : If anchor tenant leaves, tenant has right to terminate or pay reduced rentRelocation rights : Landlord can relocate tenant only with tenant's consent
Red Flags
No operating expense exclusions (tenant pays for capital improvements, leasing costs, etc.)
Broad "additional rent" definition (anything landlord demands becomes rent)
No cap on operating expense increases
Narrow use clause (limits flexibility to assign/sublet)
Landlord's recapture right on assignment/sublease request
No non-disturbance agreement (SNDA) when lease subordinate to mortgage
Short cure periods for non-monetary defaults (5-10 days is too short)
Continuous occupancy requirement (prevents going dark even if paying rent)
Weak tenant credit with no guarantee
Overly broad operating expense exclusions
Tenant-favorable early termination rights
Assignment to affiliates without consent and without original tenant remaining liable
Tenant's self-help rights (offset against rent)
Long notice periods before landlord can terminate for default
Best Practices
Credit check and financial statement review before signing
Detailed Work Letter (Schedule C) specifying all work, costs, timing
Broad operating expense definition with minimal exclusions
Management fee market rate (5% multi-tenant, 3% single-tenant)
Tenant remains liable on assignment (no release)
Reserve rights for approvals (alterations, signage, subletting)
Negotiate operating expense exclusions (capital improvements, leasing costs, ground rent, mortgage)
Obtain SNDA if lease subordinate to mortgage
Maximize TI allowance and free rent
Broad use clause for flexibility
Assignment/sublet rights without recapture (or limit recapture to full assignment >5 years)
Renewal options with FMV arbitration (not landlord's "fair determination")
Audit rights for operating expenses
This skill activates when you :
Review or negotiate commercial lease agreements
Analyze lease economics (rent, TI, free rent, operating expenses)
Advise on net lease structures
Evaluate renewal options and rent determination
Draft or review lease schedules (especially Schedule G special provisions)
Assess landlord or tenant negotiating position
Compare lease terms to market standards
Key Lease Components
Net Lease Structures | Skills Pool