In a single-net, double-net, triple net, or any kind of commercial gross lease, some of the basic property expenses are meant to be covered by tenants, while other charges outlay on the owner/landlord.
Who covers which expenses is determined on a property-by-property basis; their taxes, maintenance needs, and insurance – clearly spelled out in the lease contract. This is why there is no standard formula for making a lease.
If you need more information on different types of industrial gross leases or any leases at all, or “just” have real estate questions – do not hesitate to please give us a call. IPG offers assistance on specific transactions such as lease understanding and audits.
What is an Industrial Gross Lease?
What does industrial gross mean? An industrial gross lease, also known as a modified gross lease, is a commercial real estate contract that is used to create a beneficial deal between the property owner and the tenant – on an industrial or a warehouse property.
In the industrial gross lease, the tenant is responsible for the operating expenses of the property and pays them to the property owner through agreed-upon monthly rent.
The terms of each industrial gross lease can vary from the specifications of the commercial space and how the tenant will use it for their business. As a result, these terms are often a mixture of an industrial gross lease and a triple net lease, with a difference that in an industrial gross lease the tenant is responsible for some of the operating expenses paid on a monthly rent amount.
Double Net Lease and Gross Net Lease Differences
What is an industrial gross lease and how does it compare to a “regular” gross lease or a triple net (NNN) lease?
A double net lease (the ‘NN’ lease) is an agreement where the tenant is responsible for both property taxes and incentives for insuring the building. Unlike a single net lease (tenant pays only property taxes) a double net lease requires the tenant to pay property taxes and the maintenance expenses along the way.
On the other hand, the industrial gross lease definition can be described as a full-service lease, and is the opposite of a triple net lease. In the gross lease, the renter writes a single check to the owner and admonishes the responsibilities for all the expenses of the building. A gross lease is more common in industrial, office buildings, with a number of tenants.
In a typical industrial gross lease definition, the landlord pays all for all of the building’s maintenance, insurance, and property taxes, and the tenant accepts reasonable caps on the landlord’s exposure and pays for the use of services and utilities.
In a triple net lease, the tenant assumes most of the operating expenses and property costs which usually include:
- Property Taxes
- Insurance Premiums
- Maintenance, Repairs, and Upkeep
Industrial Type of Gross Double Net Lease
As you’re searching through the commercial real estate on the market, you may come across the term “IG” or “IG Rent”, suited to industrial business or warehousing. Industrial gross (IG) rent implies that the tenant shares the operating expenses of the building through a monthly rental rate.
For example, in an industrial gross lease definition, a tenant is required to pay a rent amount that covers all the upkeep and maintenance costs, insurance premiums, but not the utilities or janitorial services.
On the other hand, triple net (NNN) rent is typically lower because the tenant is responsible for taxes, insurance, and maintenance expenses, besides their rent payment.
Industrial Gross Double Net Lease Negotiation Strategies
Over the last few years, IPG has negotiated a number of industrial gross leases for offices, retail and industrial properties throughout California. In doing this, we have experienced a wide variety of successful and unsuccessful strategies that we would like to share with landlords and tenants in order to incentivize.
What does industrial gross mean for your negotiation strategy?
Industrial Gross Lease Strategies For Tenants
An industrial gross lease can be advantageous because they have a location clause, and although they may share some operational costs, they don’t have to assume all the expenses and responsibilities.
However, increased rent payments are inclusive of shared operating costs, as well as any other additional costs that a tenant will have to cover himself. This can bring financial strain and risks to the succession of a business in an industrial location.
Discounted Rent and Rental Abatement/Free Rent
The most straightforward clause in the industrial gross lease is discounted rent. With this authorization, the tenant can pay a diminished amount of first rent even for all of the lease term.
Also, rental abatement is the most common industrial gross lease incentive with whom the tenant is not required to pay the base rent for a predestined portion of the lease duration.
Tenant Improvement Allowance
The most expensive concession in the industrial gross lease requires an immediate capital outlay on behalf of the landlord. With the clause called tenant improvement allowance, the landlord pays for adjustments to suit the needs of the tenant. The allowance is typically negotiated on a “Dollars Per Square Foot” basis and the extent of the lease.
Getting the financials in Order
By presenting a professional image in your initial industrial gross lease proposal, you dramatically increase your chances of a successful negotiation. We recommend that you include the following financial insights with your letter of intent:
- 2 years of tax returns
- current bank statements
- complete lease application
- links to your companies website
Pick one category of concessions
If you present an offer claiming rent reduction, free months of rent, and/or a tenant improvement allowance – the landlord is most likely to feel that you are not serious about the space and may not respond at all. By picking one category of concessions you narrow the scope of the negotiation and increase your probability of making a deal.
Industrial Gross Lease Strategies For Investors
An industrial gross lease gives the investors control over certain features of their property if they don’t want it to be the responsibility of their tenants. Many investors use industrial gross rent to cover the costs they assume through an industrial gross lease and minimize financial risks.
Utilizing a leasing broker
The most extreme negotiating mistakes have been committed by landlords who are acting alone. Utilizing a real estate broker creates a layer of “cushioning” in the negotiation, furthermore, multiplying prospective tenants which will increase the landlord’s bargaining position.
Stagger the months of free rent
Another common mistake landlords are inclined to make is having industrial gross rent for all of the months or rental discounts occur at the beginning of the industrial gross lease. Sometimes the tenant may be unable to pay and then leave, and the landlord will be left with the empty space for months, without any financial return.
A better strategy is to apply free months periodically (for example months 2, 13, 25) so the tenant has an extended period prior to receiving their concessions.
How Can IPG Help?
Hopefully, you have understood what is an industrial gross lease, how its assets can benefit both tenants and landlords, and why you should carefully consider how each term will affect their present and future goals. IPG is an innovative kind of commercial real estate company that relies on easy-to-use technology and a responsive team of real estate professionals that take care of their clients’ needs and wishes.
We deliver the most transparent, flexible, and comprehensive experience in the market. Get in touch with us, and start your search today!
