Have you ever wondered how restaurants, retail stores and other types of convenience, goods or service providers open new locations? Many of them lease space in shopping centers, strip centers, or free-standing, single tenant buildings in highly desired retail locations. Leasing space allows retailers to stretch their investment dollars by not having to purchase and build-out a space for their business. In a retail lease, the landlord (property owner) makes the capital investment in the real estate and the tenant pays a monthly rental expense plus their utility costs and additional rents called “the Nets” which as discussed below).
What Is a Retail Lease?
As the name suggests, a retail lease applies to those spaces or premises intended exclusively for retail, i.e. selling goods or services. For example, the premises used for a clothing store is leased out on a retail lease. The same goes for shopping malls, individual shops, pop-up stores, and even restaurants.
Here are 5 Types of Retail Leases:
Retail leases fall into the following general categories, although not everyone defines them exactly the same way. Take care to make sure you are on the same page with your counter-party when using these definitions. In all cases, the tenants pay their own utility costs. Note: this article does not cover mall leases, which are an entirely different animal.
1) Single Net Lease
Also called a net lease, this structure puts the obligation of property taxes onto the tenant. The landlord will pay for routine maintenance, repairs, and insurance.
2) Double Net or NN Lease
An NN lease structure passes the payment of property taxes and insurance premiums to the tenant, while the landlord shoulders the maintenance and repair costs.
An NNN lease obligates the tenant to pay for all of the building costs: property taxes, insurance and repairs and maintenance (the three “nets”) as if the tenant owned the property. In some NNN leases, the lessor retains the obligation to pay for structural repairs if any are needed but a “pure NNN lease” passes the structural repair responsibility and cost to the tenant as well.
4) Build-to-Suit NNN Lease
A build-to-suit NNN lease has the same tenant responsibilities as a NNN lease but also provides that the landlord build a new building for the tenant to the tenant’s specifications. The landlord will generally handle all of the design, entitlements, permitting construction and finish coordination on behalf of the tenant and the landlord will pay for the development. Once completed, the tenant will take possession of the new building and begin paying rent and the three nets.
5) Reverse Build-to-Suit NNN Lease
A reverse build-to-suit NNN lease is the same as a build-to-suit with one twist: instead of the landlord handling the new design and construction the tenant will design and construct the building on its own. Afterward, the landlord will reimburse the tenant for the new building, or an agreed flat amount, and the lease continues as a NNN lease.
Conclusion for Retail Real Estate 101
Different types of retail businesses call for different types of leases. When venturing into business, it is crucial to find the most strategic and cost-effective location for you to operate your retail store from. This brings in the need for engaging in a lease contract, especially if it involves new construction. However, if not careful, you may end up getting the short end of the stick.
To prevent this from happening, it is always advisable that you work with reputable landlords and developers who are not only knowledgeable about retail site selection but also have the funds to purchase or build the retail stores you need, on time and on budget such as our team here at N3. Contact us today and launch your retail business to success.