The WAY to WOW Shows
Mutually Beneficial Leases
May 1, 2024
Automatically generated from YouTube captions; names and wording may contain errors.

[0:00] to people making money I'm your host Kevin bemel it's good to be back after several days off for uh some holidays and uh we are here every Wednesday at 10: amm Pacific time to talk about matters related to careers building a business and um and generally Building Wealth so um today I'm I'm going to be talking about a real estate topic I've done a few of these um this season um talking about different aspects of um of investing in real estate um however

[0:38] this subject would also not would does apply um if you're running a business and your renting space in order to um conduct you know your business so whether it's office or retail or industrial really doesn't matter um you'll see as we talk about these various types of leases that um on that the information will apply from the tenants perspective as well as the landlord's perspective so um one of the thing before I I get

[1:14] into and I I did a PowerPoint as you you might have guessed but before I get into that I I I want to talk a little bit about the philosophy between landlord and tenant or the owner of the building and the occupant of the building so um there are different um philosophies if you will that um landlords and and leasing agents Etc seem to pursue one is to squeeze out every last penny they possibly can from their tenants um and

[1:53] and look there's there's a a a strong reason to do that um and and that is that um hold on one second there some there it goes okay it was the wrong crawl was at the bottom of the screen and and there are strong incentives to do that because generally speaking as we've talked about in in previous shows the value of a property is related to how much income it generates so by squeezing out every last

[2:28] penny um one is maximizing the value of the property now um that would seem to be the case um however often times when that when when that strategy is pursued um there's a compensating um more rapid turnover of tenants um either because um they it ends up you know that they can't afford the rent or um knowing that they're

[3:03] paying absolute top dollar for the space that they're renting so they expect a level of of service um that you know for various reasons either because it's not economic or it's just not logistically possible to provide them and so then they get fed up and they leave and they find another property so so there's there's I argue there's a balancing that needs to be done in renting a space to a tenant and one of the things that needs to be

[3:39] looked at is can the tenant actually afford the space or afford the rent that you're trying to get for the space um and if the tenant cannot um then perhaps then there's a couple of Alternatives one is to consider not getting the ABS abolute Top Dollar Rent um if you think that um the you know the tenant um is is a good tenant they have a good business they're likely to grow um so then it may make sense to give them a Break um and give

[4:16] them the opportunity to be an occupant in your building and and grow um and and you know start out with a um a a very sort of harmonious working together attitude another possibility is just to say you know you you can't afford this space and so you know I recommend that you go somewhere else or if you have a different building maybe nearby where the rents are lower say you know I think you should check out my building at you know such and such an address that sort of thing now obviously that's easier to do in a tighter Market where you know

[4:53] there are a lot of tenants or at least there's um opportunity to fill your building um when when the market is um when there's a lot of vacancy and or there are fewer tenants which is I think you know more the case now especially in the office market right so then um again trying to squeeze out every last penny um may not be the the best economic decision to make and so these different lease types

[5:28] will afford you the opportunity to hopefully strike a mutually beneficial uh agreement with with your tenant um in such a way that you and the Tenant essentially grow together okay excuse me turnover is always costly okay because first of all there's going to be some loss of rent unless it's a very very very tight Market there's going to be some loss of rent there's probably going to be some expense preparing the space um there may be

[6:04] leasing commissions all those kind of things so having a long-term tenant um that pays on time um that takes care of the property that um you know you can deal with in a a calm reasonable way um over the years I think you will find that that pays level of dividends um and you you may not get absolute top dollar for that from that tenant but you your your bottom line may

[6:39] not really suffer because you won't have additional turnover you won't have additional expenses etc etc etc so I I encourage you to keep that in mind as we talk about these various lease types um and and you you know you you you think about think about it whether you're think whether you're dealing with it from the landlord's side or the tenant side from a tenant standpoint uh you know I think that um you know you want to first of all you want to demonstrate um knowledge of the market second of all you want to be able to demonstrate um

[7:15] the strength of your business your ability to pay um your desire to have a a cal um um working relationship with the landlord or the management company okay and and by the way I I I would say if from the beginning you get a landlord that's that's very sort of or a leasing agent that's very sort of dictatorial okay that may be a warning sign that this is not a good place for you to have your business when look you know unexpected things happen and you

[7:52] know if you've got a landlord who is unsympathetic to um you know changes in the business business environment etc etc um that can be a real problem going forward so um I I again I would encourage you as a tenant um to think about that um and and not go the other way which is you know grind down to get the absolute you know lowest rent payment you possibly can um because when you're getting the lowest rent payment you possibly can you're probably going to be giving up um service qual quality

[8:29] of the property common area maintenance these kind of things um that in the end may turn off potential clients or customers um may make it uh uncomfortable for your employees your your team members and and all of that becomes uh you know very problematic and then you've got to end up moving and it's costly for a tenant to move as well right you've got to take time find the new space you've got to um fit out the new space you've got to hire Movers um there's disruption in your business right so um I think it's you know the

[9:06] best situation is one where landlord and tenant uh can work together amicably um for you know to you know for the mutual good if you will for each to better each other's situation okay so now let's let's get into some of the the details oops click the wrong place okay so types of leases okay and uh okay and as is always the case on the way to wow shows everything um revolves

[9:41] around the three pillars of attainment we're really talking about uh finances the finance Realm of the Pursuits pillar um but but also you know relationships play into leases as well in the end the lease is a document um setting out the terms of a relationship and so while you may not consider you know a tenant to be your friend per se you know I I I look at friends in a in this case in a very broad way it includes colleagues it includes um people with whom you have a business relationship um and and the fact of the

[10:18] matter is the more cordial those relationships even if there you you're not you know bum buddy kind of thing really the better off it will be for you in the long run all right so um there are essentially three types of leases there's a gross lease a modified gross lease and a net lease and net leases tend to come in three varieties single double and triple net okay and then so we're going to talk about those types of leases and then we're going to talk about some um other issues that relate

[10:55] to leases these are not um types of leases these are um aspects um of a lease that apply to um one or or two or or more of of the leases of the different types of leases so cam charges options to renew and percentage rent okay so let's start out with a gross lease so um if you've ever rented an apartment most likely you signed a gross lease meaning you paid you pay a certain amount of rent and that's all you pay so

[11:32] you may pay you know $2,000 a month to rent your apartment and that's it okay there's there's no what are called reimbursements so you're not paying in addition to your rent a reimbursement for let's say uh property taxes on the property you're not paying a reimbursement for insurance okay now there may be some additional fees um you know you may have to pay a key fee or but that's to typically a one-time fee um you know you may have the opportunity to rent an additional parking space okay

[12:07] fine um but you're getting an additional service for that parking space fee um you may have an opportunity to rent um a you know a storage room again that's that's an additional service um but um the the the bottom line for a gross lease is it's it's a rate and and as a tenant you know what you're going to be paying each month it's not going to vary as a landlord you know what the tenant's going to be paying you're taking the

[12:42] risk that if expenses increase okay um you'll have to pay those increases so uh hang on one second oops okay um no it's not okay sorry um you know everything goes crazy right at Showtime um so as the owner of the building when you have tenants on Gross leases you're going to be if if the

[13:17] expenses increase you're going to be paying that for those additional expenses on the other on the other hand if the expenses decrease um you're going to benefit from from that okay um and so none of the expenses of operation are are passed through uh to to the tenant okay and and and and that's you know real real real basic okay okay so in a modify gross lease okay the rent includes reimbursement for some

[13:52] expenses okay and um often almost always the reimbursement part is is um uh designated separately so so for example um the you know the lease rate may be a dollar a square foot and the expense reimbursement rate may be quoted as a per square foot feed like Point like eight cents a square foot or um excuse me it may just be a lump sum like uh $300 a month for expense

[14:28] reimbursement okay now um how is this different than a modified gross lease well it it gives the landlord and tenant um two different aspects of of um of income and payments depending on whether you're the land landlord or the tenant in which to negotiate okay um and and if the expenses go up so then um you know there may be a separate uh clause in the lease that allows the reimbursement part of

[15:04] the rent not of the rent the reimbursement part of the lease to increase as well okay so it may be that the owner has to present uh certain information to the tenant and once that's done like 30 days later then um the expense the reimbursement portion that the tenant pays uh can go up so um that's just uh you know um you know like I said it gives you sort of two negotiating points um instead of one and it gives the owner um some limited

[15:39] protection um in the in in the event that um expenses increase okay in a net lease okay the tenant is paying rent plus an expense reimbursement and let me just see I forget I okay yeah okay so you have um single double and triple net leases in a single net lease typically the tenant is paying rent plus they're paying the property

[16:17] taxes and assessments on the property on a prata basis so let's say there's uh three tenants in a property one tenant has half the space and the other two have a quarter each okay so the tenant who has half the space pays rent plus 50% of the property taxes and the other tenant the other tenants pay their rent plus a quarter of the property taxes that's in a singl net lease okay and and I said like I said

[16:52] it's usually they're they're paying reimbursement for property taxes sometimes you'll see it differently but but almost always it's going to be property taxes and assessments in a double net lease the tenant pays rent plus the tenant reimburses property taxes and assessments and insurance and again it's on a prata basis okay so if you've got a building that's a single tenant building okay and that single tenant has signed a double net lease so in addition

[17:28] to their rent they're also going to pay all of the property taxes and the the cost of all the property taxes and assessments and the insurance okay now the property is in the name of the owner the property tax bill comes to the owner in the owner's name so the tenant isn't receiving the property tax bill directly the owner is and then depending on how the lease is set up the owner is essentially billing the tenant for what the property tax amount is now um in

[18:04] some CA and and in the case of a double net lease the same thing is true the owner is carrying a liability and Casualty property U I'm sorry the owner is carrying a liability and Casualty policy on the property okay and in a case where there's only one tenant in the building the owner then bills the tenant for the cost of that insurance now in some cases it'll just be a situation that when the payments are due the owner makes the payments and then bills the tenant for the reimbursement um in other cases the the

[18:42] um the expenses for property taxes and assessments and insurance are estimated and then their um uh uh that estimate is divided by 12 and the Tenant pays a monthly amount okay and then at the end of the year there's a Reconciliation to determine if the tenant has paid enough or paid too much or paid the right amount and if the tenant um hasn't paid enough he'll be build for the difference if he's overpaid typically the money won't be refunded but it will be applied to the

[19:20] next year's uh property taxes and insurance uh reimbursements um and and and the the process starts starts over again the following year now when a trip net lease in addition to the tenant paying rent reimbursing property taxes and assessments and reimbursing Insurance the tenant also reimburses what are called cam charges we're going to talk about cam charges in a minute but cam stands for common area maintenance so in a typical commercial

[19:55] building okay there are common areas that is areas of the property that are used by more than one tenant so for example a parking lot at a shopping center is common area okay that parking lot uh needs to be cleaned the Landscaping needs to be U maintained um there are expenses for electricity to keep the lights on in the parking lot there's probably a sign like a pillar sign of some kind where all the tenants businesses are advertised that

[20:31] needs to be maintained and the electricity to light that sign needs to be paid there may be common area restrooms that need to be um kept clean um and and there can be all kinds of other cam charges okay all of those together are considered common area maintenance even though part of it may be things like electricity uh trash collection and there may be Central trash collection for example so in that case that would be a cam charge okay all of those together then are reimbursed by the tenant and again it's on a prata

[21:08] basis so going back to our first example where there's three tenants in a property one tenant has half the space and the other two have a quarter each so what will happen one of two things will happen either um each month the owner or the management company will add up whatever the uh cam charges are and whatever other expenses there's been for the property and then send a bill to each tenant for their pro-rated share or more commonly especially in a multi-tenant property the um the

[21:45] property taxes and assessments insurance and cam charges for a tri net lease will be estimated and the tenants will pay the same amount each month and then again like we were talking about a few minutes ago at the end of the year there will be a Reconciliation of all of those expenses and if the tenants didn't pay enough they'll get a a they'll get a you know a bill at the end of the year for the for the additional amount if they pay too much typically it'll be credited against next year's uh reimbursements rarely by

[22:21] the way does it turn out that they paid exactly the right amount because it's very hard to um to be you know to be 100% accurate in estimating these various expenses okay so um for for someone who wants a very easyto manage real estate investment but they want to own property directly oftentimes what they'll look for is a single tenant tripl net leased

[22:56] property where the tenant is a high quality Regional or national tenant so there's very little credit risk meaning there's very little risk that the tenant won't pay the rent okay and and so in that case and an example would be um a McDonald's okay let's say you own um a property on a on a high visibility Corner um it's it's entirely possible that McDon you know m probably not corporate McDonald's but maybe a

[23:31] franchisee will come and say hey I W to I want to rent your your your property here um and I'm actually even G to build the building um that I need and I'm gonna and and it'll be a trip net lease so um the tenant will um you know McDonald's especially a strong McDonald's franchisee that's a great credit risk okay they're going to pay rent plus they're going to reimburse property taxes and assessments insurance and all the cam charges so when the when the owner gets the rent payment each

[24:07] month they know they can just put that in their pocket they don't have to worry about whether the expenses go up or down doesn't matter because the tenant is going to pay all that okay um now on a on a property like that typically the return is lower than a property that has more risk so if if you have a a property with a gross lease where the landlord has the exposure to um uh to expenses increasing so then um those those kind of properties tend to sell at a higher

[24:44] return because the owner is taking on more risk okay now you can have by the way I mean it really depends but you can have um a property with with gross leases selling at a similar rate of return or even a lower rate of return as a uh single tenant high quality triple net lease property um so for example like a 4unit apartment building um it's not really an apartment four un like like a fourplex um you know that may sell at something you know like a four or five

[25:20] perc return these days um and a a um a high quality uh triple net lease single tenant property you know that may sell at maybe five or 6% you say well wait why there's so much less risk um for the um for the tripl net single tenant property why would it sell um you know at a similar um rate of return to a fourplex and the answer is typically um well yeah typically a lot more people

[25:55] can afford to buy the fourplex there's a lot more um demand for that type of investment which lowers the rate of return okay so a a high quality trip net single tenant property you know takes a lot typically takes a lot more capital and so relatively speaking there's fewer uh buyers fewer investors um and and but by the same token it's a lot lower risk and so when you look at various factors that impact

[26:30] the rate of return on property and and maybe I should I'll have to do a show on this I think so we can under understand this better but but sometimes those factors work out in such a way that um you know a comp a competitive return on a like I said a high quality tenant single uh single tenant trip net n property is pretty similar to the return on a fourplex um it just it just works out that way so so um you know for for a for an investor um uh having a net lease

[27:06] is is a benefit because it protects you against um increases in expenses um and and so doing makes the investment less risky but also typically then will um mean that you're going to get a lower return on your investment because you have lower risk okay all things all the other things being equal for you as a tenant what is your incentive to sign a tripl net lease or or a dble single or double net lease well you may not have a choice okay it

[27:42] may be that if for the particular type of property that you're that you're looking to rent that is um how things work for that type property so for retail properties for example shopping centers trip net leases are pretty standard okay um and and so you know especially in in higher quality properties you just may not have the option of um you know a gross lease on a retail property unless you're going to a sort of you know Class C you know very

[28:17] low quality retail property and a in a you know fairly in a not very good location right so you know that's something to look at now if your business is very dependent on high traffic so you know you may just have to accept the fact that um you're going to have to sign a triple net lease on the other hand if the market that you want to be in if there's a lot of vacant space okay and landlords are are you know finding it difficult to get tenants and and and you have you know good

[28:52] credit and all of that so you might be able to um uh you know negotiate even if the landlord is absolutely insistent on a trip net lease you may be able to negotiate some kind of expense stop whereby even if if if expenses go up by a lot um only a part of that can be passed through to you okay so these are all negotiable items okay and a lot depends on what the supply and demand factors are in the marketplace for the type of property you want in the type of

[29:28] location you want um and and with respect to a particular property so um you know overall the market may be pretty tight but there may be um uh you know one property that for whatever reason like they may have just lost um um their anchor tenant let's say it's a shopping center and um um I'm trying to think of a anchor tenant that's had trouble recently um I Michaels I think the um the uh sort of you know home uh what do you call like hobby type stuff I think they're having some problems if I

[30:04] if if my memory serve so let's say you know Michaels and they were the major ten the shoing let's say a Michaels closed okay so now all of a sudden this anchor tenant that draws a lot of traffic is gone okay that that so that even though it's a tight Market um now all of a sudden this one particular property has lost their anchor tenant and they're they're struggling so you may be able to you may have leverage in that case uh for that particular property um and you may decide well you know I've got some negotiating leverage

[30:39] here and so I'm going to take a chance on going into this property even though it doesn't have um its anchor tenant with the hope that when the anchor tenant is replaced it'll be a good draw and your business will pick up and you know etc etc etc so those are all different aspects to look at when you're a tenant in terms of deciding how you're going to approach things okay so those are the types of leases now let's look at um some of these other factors um that I mentioned one of them is common

[31:14] cam charges common area maintenance charges so as I I said briefly before um it actually includes more than just common area maintenance so while it does include maintenance and repairs okay it also includes utilities it typically includes management costs and oftentimes it'll include a a replacement Reserve Factor um so for example the parking lot periodically needs to be what's called slurry coated and striped a slurry coat is um it's it's almost like painting the parking lot what it

[31:50] does is it protects against um water intrusion and the deterioration of the parking lot okay and then once you slurry coat then you've got to go back and put the stripes in again obviously the stripes are there so people know where to park right so that's not something you're doing on a monthly basis or even an annual basis that may be done every five years or every eight years you know depending on the climate depending on the how heavily the parking lot is used the type of property that sort of thing um and so um these longer term maintenance items um what what may

[32:28] be called Capital items okay um rather than hitting tenants up at the time they're done with a big expense oftentimes what property owners or their management companies will do is set up a replacement Reserve so that money is accumulated over time and then when one of these big expenses comes up uh then the the funds are there or at least mostly there um for that capital Improvement and they can go ahead and do it and there's not a big disturbance um to the tenants finances okay it's a much

[33:05] better way to go um and you know it's it's much more stable okay so all of these things get included in common area maintenance typically now um you know in it for any particular property one or more of these may be excluded um and other things might be um added in it just it it really depends are standardized leases for example the air lease the um Association of industrial Realtors lease um you know they have standard common area maintenance Clauses

[33:40] okay but even then just because U you know a landlord is using a standardized form that doesn't mean that um it hasn't been altered by something in an addendum that you know says uh you know Clause five is hereby altered as follows or something like that so you always need to be aware of those kind of things when you're reviewing a lease okay I Would by the way I I when you're if you're a tenant and you're looking at properties that are tripl net leas properties when you

[34:15] meet with the leasing agent or the owner if the owner is doing it directly himself one of the things I recommend you ask is what what what are the cam what are the cam charges estimate and you usually they well they should have an estimate on a per square foot Baseline you may say well it's you know 23 cents a square foot or it's 17 cents a square foot or it's you know in a in a shopping mall okay it could be you know a156 a square foot or something like that it could be much much higher okay so you want to know going in what the

[34:51] current cam estimate is okay so that you can factor that into the cost for renting that space okay and then also talk to them about you know how typically you know at the end of the year when you do your reconciliation um you know what typically what kind of bills have you been issuing over the last couple of years okay they should be able to give you that information they may not have it off the top of their head okay they may have to look it up but they they should be willing to give you that information they if they want you to go in blind that is not not a good

[35:29] situation okay you don't want to go in you don't want to be running a space blind because then you can't uh you know do good financial planning for your business okay and it also May mean that they're not you know doing reconciliations regularly and and what's going to happen is two or three years down the line all of a sudden you're going to get a great big bill um because they finally got around to doing the cam area cam charges uh reconciliation and now bang you know you're faced with a you know four or five figure um expense

[36:04] charge that you weren't expecting and you know how are you going to pay that kind of thing okay so um it's you know this is something to to talk about figure out what's included in the cam charges what are the cam charges estimates um what typically happens at the reconciliation point when is it done how often is it done all of those should be discussed and they should be um in the lease as well okay next okay option to renew so um

[36:39] typically a um you know a tenant will well you know you can have a month-to-month what's usually called a rental agreement okay you see that most often with Apartments um but even the but these days even in a a fairly lowquality building you're probably going to sign some kind of lease now a lease has a set ending date could be a six-month lease a one-year lease a nine-month lease uh you know a six and a half month lease it really you know really doesn't matter what what what matters is there is an ending date for

[37:17] the tency stated in the lease once that end date has been reached typically one of a couple things happens now in a in an apartment usually the tenant will go month to month or the landlord or the management company will um will ask the tenant to sign on for another term maybe six months maybe a year whatever it is okay in a residential situation those are the two most likely it's fairly unusual to have an option to renew an

[37:54] apartment lease now if you're Renning a house sometimes houses will have options to renew um but you know not not not particularly common in commercial space office retail industrial options to renew are more common okay now an option to renew gives the tenant the right to extend the term at the tenant's option okay so let's say you have a situation it's a retail space the ten signs a three-year

[38:29] lease and at the the rent for the third year um is $5,000 a month in the meantime the market rent for that space has increased to $6,000 a month okay so if the tenant left the owner could get an additional thousand a month for the space right well if the tenant doesn't have an option to renew at the end of that threeyear release the landlord could go to the tenant and say well I know you're paying $5,000 a month now

[39:04] but market rate for this space is $6,000 a month so if you want to stay you'll have to sign uh a lease starting at $6,000 a month okay and then the tenant you know you negotiate and you know maybe the tenant say well but you know you're not going to lose any rent I'll so you know I'll sign at 5800 or something like that it'll be a negotiation okay another situation same thing tenants paying $55,000 a month the last month of a the last year of a three-year lease at the end of that third year Market rent is 6,000 but the tenant has an option to

[39:43] renew okay and that option to renew has the rent is is already specified in the option so the tenant may have the option to renew for another three years and the rent for the first year of the option may be let's say $5,500 well that really works out to the tenant's Advantage right because if the tenant had to pay Market rent he'd have to pay closer to 6,000 by having this option to renew um

[40:18] he can he can renew and pay 5500 he can stay where he's at there's no disruption to his business and his rent is below market rate so that's really a benefit for the tenant and that's why by the way owners oftentimes don't like to give options because in the end it puts a lot of power in the tenants hands so let's take an opposite scenario where the uh tenant has a three-year lease the rent for the uh final year of the of the three years is $5,000 a month but in the

[40:55] meantime Market has dropped to $4,000 okay and the tenant has a an option to renew um starting at $5,500 well why would the tenant do that right they're they're not going to exercise the option and pay $1,500 above Market rent more likely they'll go to the owner and say look we'd like to stay but we don't want to we don't want to um uh we don't want to use our option um because the rent in the option is way we

[41:30] don't want to exercise our option is the term the rent is way too high so we'll negotiate to stay but the market rent is 4,000 even if we leave all you're going to get is 4,000 so we'll agree to stay for another three years um first year will pay $4,000 a month so do you see that the tenant has kind of The Best of Both Worlds um in an option to renew so again for for some some landlords I i' I've dealt with on principle they won't give options um I I think it really depends um you know

[42:07] what's going on in the marketplace how um you know how much you want to um keep a tenant for a good tenant um you know it it it oftentimes may be worth the risk that you're not going to you know be able to maximize your rent by giving them an option um and just you know you just have to understand that if the rent decreases the option becomes meaningless and you're still going to have to negotiate with the tenant to stay okay well I mean that's you know that's the vagaries of of owning real estate now there are a couple of ways well not a couple ways there are various ways that

[42:42] an op the rent can be determined um in an option to renew one is it can just State like like we said it's going to be $5,500 year one of the renewal and then 6,000 year two and 6500 year three or whatever other words there can be fixed amounts there can also be a percentage increase um and that percentage um increase um that percentage increase um could be a set percentage like 3% or 5% or it could be based on

[43:18] for example the Consumer Price Index so um it might say you know tenant has one op one uh option to renew the lease for a three-year term and the beginning rent for that option will be the the whatever the the rent was for the final uh year of the lease um um increased by the Consumer Price Index for you know all Urban consumers uh Los Angeles Long Beach blah blah blah blah blah whatever it is and and in that way um the uh the rent keeps

[43:55] Pace with um uh a a a fairly typical indicator of inflation right and and and so the owner has some protection and and in a way the tenant does too so the tenant's not going to be uh hopefully overpaying they're just going to be paying whatever you know the inflation factor is okay another way to um determine to to deal with the rent issue rental rate issue is to is to have an option and the rent will be determined now for example it may be determined by an appraisal of Market rent or something

[44:31] like that now this is unusual especially for a smaller tenant normally you would only see this where there's a lot of money at stake um and and uh you know it's worthwhile to for example pay for an appraisal um uh in order to determine the rent and and to sort of go through that whole process it usually takes place you know six nine months before um the lease ends and the option has to be exercised um so that um the tenant um knows at the at the point where the tenant exercises it that they know that

[45:08] there's an agreement on what the rent will be okay so in that case um the owner has more protection um in terms of uh what the rent will be in the in the option period okay the tenant has less but at least there's a there's some continuity there and there's a mechanism for determining the rent um and and creating agreement on what is reasonable in the marketplace okay so those are options to renew and by the way there could be one there could be multiple options um they could and and the time

[45:43] period of the options can be different they can be shorter or longer all of that is is subject to negotiation okay this is our this is our last um topic for today on leases so there's something called percentage rents now um if if you were following um the real estate market um uh back during uh like 2020 when Co hit um a lot of tenants restaurants retail stores were hit very very hard

[46:19] and their income dropped uh you know substantially to the point where they couldn't pay the fixed rent that um was in their lease in order to help those tenants survive um some landlords went to them and said I'll tell you what at least for the time being you can just pay a percentage of your sales for rent okay 10% 15% you know I I I can't tell you what different people negotiated okay um but what that did did

[46:57] was it allowed the tenant to stay and and and it it allowed their rent to sort of vary with the income that they were able to generate which made it easier for them to survive from the landlord standpoint rather than having an empty property it got them some income um you know typically far less than they were getting before but at least they were getting some income okay and there's a value to having you know your your property occupied and so they didn't

[47:33] have an empty property sitting around um and so now there what I just described was what's called a straight percentage lease where the the rent is purely a function of a percentage of the tenants sales now um ex except for a time like covid those are pretty rare okay usually what you have is a base rent and an overage Clause so in other

[48:08] words um you have and and it's it's fair most common percentage lease percentage rent uh leases are most common in the retail uh in retail leases so let's say you've got a store okay and it pays uh five uh pays $5,000 a month um in rent okay and it has an overage Clause of 5% meaning if 5% of the gross sales of that business

[48:45] each month would be higher than $5,000 the tenant will pay the overage okay so now let's look at how this works let's say in uh let's see we're we're May or so in April let's say the tenant had sales of $90,000 so 5% of $90,000 is $4500 that's less than $5,000 no overage is due okay and it's usually done on a monthly basis by the way okay let's say the prior month March

[49:22] the tenant had sales of $100,000 well 5% of $100,000 $5,000 base rent $55,000 no overage gets paid let's say this month May okay the tenant has $120,000 in sales okay the first of the month they're going to pay their $5,000 base rent okay and at the end of the month when they total up their sales $120,000 5% of that is

[49:59] $6,000 so they owe overage of ,000 so they should be sending the landlord an another, uh you know in rent okay now does it happen that way sometimes other times what happens is at the either monthly or annually or quarterly depending on again the lease the the the tenant has to report their gross sales and then the landlord calculates you

[50:34] know what is 5% um for each month or for the quarter what however again however the lease works and then they bill the tenant for the overage okay so the tenant doesn't initiate payment they just provide uh sales information and the landlord bills them for the overage so both of those are types of percentage leases now a percentage lease can be can be a benefit for a tenant because it allows their rent to vary according to their sales okay especially if it's straight percentage lease but even if it's a base

[51:09] rent with overage typically in that case um the rent increases of the base rent are lower because the owner has the opportunity to um get greater upside if the tenants business prospers okay and so for the tenant um you know they're getting a better deal on base rent um and and it may be that you know they they have particularly High sales in the summer or something like that and so there's you know they're paying overage only for a few months during the year um and you know

[51:45] and on average um that might work out better for them um because they're able to pay you know a base a lower base rent the rest of the year um and and by the way it may be better for the landlord too because that way the tenant isn't struggling other times of the year when their sales are lower um and so you know they have a reasonable base rent so the landlord can make a reasonable return on the property um but then you know during the months when the tenant really prospers so that so the owner gets a bump and and that compensates for the um you know lower base rent the rest of the

[52:21] year um and it makes again for a more harmonious U mutually beneficial relation relationship with the tenant so and all of these types of leases and and and Lease Clauses and all of this this is all by way of giving you both landlord and tenant an opportunity to figure out what is the best way we can create this relationship so that it will go as smoothly as possible create the best environment for the tenant to succeed which creates the best environment for the investment to be successful for the

[52:57] owner that's that's really the key okay and that's that is types of leases so you'll see if you have any questions these links will be in the show notes feel free to post a question in social media here's the uh the legal stuff let's go ahead and close this out okay so that's the show for today and um any you know thoughts comments questions feel free to post them as I mention our social media if you have something specific that's private you can always send me an email if it's within my um

[53:34] area of knowledge um I will um I will do my best to answer it and if it's not I will refer you on to someone who I think um is better able to do so so I thank you very much for joining me today it's nice to be back as I said in the beginning and uh we will be I will be back next week Monday at 10: a.m. with um my guest Robert uh carpus he's an accountant who specializes in trusts and Estates and so um I I invite you to tune in and hear uh hear Robert's thoughts on

[54:11] on that subject trust in Estates weekly 10: am Pacific Time Monday on Tuesday at 10: a.m Pacific Time Business lessons from the military and then seven days from today we'll be back for the next edition of people making money all at 10 M Pacific so thanks again for watching and signing off as I always do Marie you are my bell all the best folks