The following Q&A was completed as part of our conversational Commercial Real Estate FAQ Interview Series, we hope you find it helpful:
Your lease will identify the premises, the rent, net or gross, but it won’t always identify everything in a simple or concise way. Common area expenses can get particularly complicated in centers with multiple tenants, where larger tenants are carving up common “pool” areas. Figuring out the levels of complexity can be one of the big challenges of deciphering the many components of a particular retail commercial lease as an investor.
Richard Wilson: What about for someone, whether you’re the investor in a commercial retail property, or you’re looking to lease one, what are some of the major components that are unique to retail commercial real estate leases? Compared to other types of leases that maybe the investors have seen before.
S.L. Van Der Zanden: So we’re talking about the lease?
S.L: Okay, so all leases identify the premises, and the size, and the rent, and whether it’s net or gross, things like that. Where retail leases get complicated is what’s considered a common area expense. In a center with 15 tenants, you could have 12 different definitions of common area expenses that are covered, and they end up calling them “pools”. That’s one of the most complex things about retail versus other property types. Tenants, especially big tenants, have gotten very good at carving up, when normally everybody would say “It’s an operating expense, of course it’s a pass through.” and they’ll either eliminate it from the list or cap it. So it’s there, but now you can’t charge the full amount. So, just figuring it all out, it’s a level of complexity that’s very annoying in the industry.
Richard: Right, right, yeah. We were surprised when we rented retail space to operate our office out of before; just little things like the air conditioning unit for our space was owned by the building, maintained by someone else, so when we moved in, we were responsible for maintaining this air conditioning unit out of our pocket, even though it hadn’t been maintained well by the previous person. Little nuances like that, that you might not have to face within a certain type of net lease or an office lease, it’s interesting for us to discuss.
S.L.: In retail, it’s sort of the wild wild west when it comes to HVAC.
Richard: Right, right, okay.