ABC’s of Leasing – How does a Net Lease work?

Net-Lease
As much as new tenants can use an education on the world of leasing, so too can existing tenants. For newbies, certainly there is a learning curve with the terminology and nuances of negotiation. But even for tenants in the Saskatoon real estate market that may have been leasing for years, there is some benefit in going back to Leasing 101 class.

In order for us to treat your interest as serious, you will need to know: the size (square footage) you require, the budget you have to spend and the term you’d be able to enter into. We can give you an idea very quickly if these expectations are realistic. Agents should ask questions regarding your business plan. We want to make sure that you will be a good fit for the long haul.

Let’s talk Rent

It’s important to know that there is typically one type of lease available to tenants in the Saskatchewan real estate market: the Net Lease, or as it was more commonly referred to a few years, the Triple Net Lease. This is not say there aren’t other types of leasing arrangements out there, however, this would be the one most landlords have been advised to move towards and what is most commonly encountered today.

Net Rent, as defined in a net lease, is that portion of rent that the landlord uses for profit on his/her investment and to pay off their mortgage. Typically the net rental rate will be fixed for the term of the lease you negotiate. Commonly it may be fixed for five years. In the case of a longer term, such as ten years, there will often be one or two rental rate escalations.

Covering off the costs

In addition to the rent the tenant is responsible for paying monthly towards Occupancy or Operating Costs. This can also be referred to as Additional Rent in some leases. These costs include the tenant’s proportionate share of property taxes and operating expenses, which may include but are not limited to: building insurance, building repairs and maintenance, property managers, snow removal, etc.

In a multi-tenant building the water will often be on a common meter and included in occupancy costs. Typically electricity and natural gas will be separately metered, and the direct responsibility of the tenant. If utilities are common to the property they will be included in the occupancy costs estimates.

In a net lease the landlord is able to recover all hard costs associated with running and maintaining the property from the tenants. This puts a responsibility on both sides of the agreement: one, to the landlord to upkeep the property; and two, for the tenant to pay for their share of the expense.

Let’s share it

In a multi-tenant building, your share of these costs is attributed to a percentage of how much of the building you occupy. In a single tenancy, the tenant is 100 per cent responsible for all costs.

A landlord or property manager will look at the previous year’s building expenses and will estimate the costs for the next fiscal year. At the end of the year, the actual costs are totaled and it is determined whether or not the budget was high or low. You as a tenant would be eligible therefore for a refund or alternatively owe the outstanding amount. These calculations are done annually.

Protect your business

The tenant will also be required to purchase general liability insurance, from $2-4 Million outside of these costs. The landlord will purchase building and fire insurance, which will be recovered through occupancy costs. When you’re talking to your insurance agent regarding liability insurance ask the question about business interrupting insurance. Tenants don’t think of it, but it can be a life saver if something happens.

Posted by Kelly Macsymic

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