The following Q&A was completed as part of our conversational Commercial Real Estate FAQ Interview Series, we hope you find it helpful.
Those looking to lease out industrial pieces of real estate or distribution centers have plenty of options when it comes to leasing structures. Triple net leases are common in shorter term leases of less than 10 years, bondable net leases for those who are looking for more passive real estate ownership, and countless other options are available for owners and investors in this type of real estate to explore. The type of leasing one would choose depends on their particular needs and the needs of the business they’re leasing to.
Richard Wilson: So, if someone is looking to lease out a industrial piece of real estate or distribution center, it could be a landlord it’s their first time putting together a lease or it could be someone looking to lease themselves, what are a few different ways to structure those types of leases in your experience?
Robert Borris: Well, generally speaking a warehouse lease or an industrial lease is triple net, and triple net meaning the tenant is responsible for paying the landlord the rent, and the landlord from that rent basically takes care of the building, takes care of the roof, takes care of exterior issues. The tenant is responsible for paying the real estate taxes, the insurance, and whatever operating costs they could incur. And those deals are typically shorter term, shorter term being less than 10 years, 3 years pretty typical – 3, 5, 10 years, those are pretty typical. Once you get longer in lease term, instead of a real estate deal, they become more of a financing vehicle for a company. And the structure of the deal is where the landlord, the tenant is responsible for basically everything, and they’re there for 10 years or 15 years or whatever, they send checks, and the rents are escalated 2 or 3% a year or factored with a CPI component or something like that.
And then there’s another hybrid, which is a really good investment for somebody who wants to have a passive real estate ownership, and that is what is called a bondable net lease. And a bondable net lease is when somebody leases they building and they guarantee to pay you the rent for the entire term of the lease, whether the building burns down or there’s another, or there’s a war, whatever it doesn’t matter what the reason is, they’ll just pay you the rent. And it’s, now you’re looking at a credit deal, it’s more important than real estate, it’s credit worthiness of the company. And that’s typically what you find in smaller buildings, in smaller tenants, landlord tends to be more responsible for more expenses. In a small deal you don’t want the tenant necessarily paying the real estate taxes because you want to make sure the real estate taxes get paid. In every case, though, the landlord is responsible for paying the mortgage, they normally don’t flip that over to the tenant.
Richard: Right, right.