How to best structure leases from a landlord perspective?
Hi. I am doing some research around how leases are structured for Commercial Real Estate and if there is any room for improvement. Generally, per square footage price is based on market value and lease variables like term, TI, Opex, NNN / Gross or Full Service. 

There appears to be quite a few other variables at play when structuring leases - rent escalation, free months, property financing - DSR, Tenant credit, vacancy loss etc. 

My question is, from a landlord perspective, how do you think about all these different variables when making a leasing decision? Do you think you have right information, economic data to set these variables and determine lease structure? Or the process can be improved and there is value to be unlocked? 

Really curious of know your thoughts.
[{"id": "giza58e", "text": "Hi!", "replies": [{"id": "gizg3s8", "text": "In net leases, the Tenant is responsible for the operating expenses of the property, not the landlord.", "replies": [], "depth": 2}, {"id": "gizy2bf", "text": "Stop spewing garbage if you don\u2019t know what you\u2019re talking about.....", "replies": [], "depth": 2}, {"id": "gizyc2b", "text": "Yeah not how NNN works but okay", "replies": [], "depth": 2}, {"id": "gj3d3r1", "text": "This is why college is a joke \ud83d\ude06", "replies": [], "depth": 2}], "depth": 1}, {"id": "gizawdc", "text": "I aim to have all commercial property NNN (tenant always pays). I never give free months. I (almost) never pay for build out. Ultimately try to keep your payouts to a minimum and your income at a maximum. \n\nYou can always have a lawyer draw you up a good comprehensive lease and use that as a template for future leases. They are largely similar", "replies": [{"id": "gizky8c", "text": "Lol and you probably have a net worth of $100mm huh? What world do you live in?", "replies": [{"id": "gizqe3j", "text": "What world do you live? This is a very common strategy.", "replies": [], "depth": 3}, {"id": "gizy9c5", "text": "You sound more like a guy that pays instead of collects rent.", "replies": [{"id": "gj0dqrh", "text": "r/loveforlandlords vibe", "replies": [], "depth": 4}], "depth": 3}, {"id": "gj0lcmu", "text": "Yea and I bet all his tenants have lousy credit. No way a national tenant with top credit would agree to these terms unless it was an A++++++ property", "replies": [], "depth": 3}], "depth": 2}, {"id": "gj049sp", "text": "We have a very different strategy which I think just goes to show OP that this can vary a lot even in the same market. I always structure modified gross (tenant pays separately metered utilities). Annual increases of 3.5%  but tenant can negotiate down to 3%. We generally don't do free rent but in this market I have been offering a couple of months since the market softened after COVID. We contribute pretty substantially to fit out but not for tenant specific improvements. For example, if it's a retail space, I provide a fit out consistent with a regular retail tenant. If they're a restaurant they would pay for all of the restaurant specific improvements; floor drains, exhaust hood, upsized HVAC, etc. We do the work (we're our own GCs) and pass along our direct costs to the tenant.", "replies": [], "depth": 2}], "depth": 1}, {"id": "gizyfl4", "text": "I really hope this thread gets better because this is actually a topic I would like to see discussed, in the hopes of learning something.", "replies": [], "depth": 1}, {"id": "gj04oom", "text": "I think the reality is that like just about everything else in CRE, it's all negotiable. It may also depend on your loan/lender situation and any loan covenants which may nudge you, as the owner, to push more for one thing vs another.", "replies": [], "depth": 1}, {"id": "gj0de59", "text": "It is very simple, the best lease is the one where there is less risk. So, depending on your situation this might change. Many landlord love NNN corporate guaranteed leases because they are usually for multiple years and have multiple options. Also you only get your money at the end and you don't have to do anything administrative.", "replies": [], "depth": 1}, {"id": "gj0lvzb", "text": "Someone mentioned risk. Bingo. I'm a tenant rep and can't tell you how many small business clients only focus on the dollars and dates and forget about the rest. \"oh that plumbing busted out in the parking lot? that's on you\" \"One of your customers destroyed some property in the common area? Thats on you\" They don't realize they actually have to read and understand the 60 page landlord lease or it could mean their business.", "replies": [{"id": "gj3cheb", "text": "Yep - the rent/cam fees are obviously important but my opinion has always been that the primary objective of lease negotiations is clear cut risk mitigation for unforeseen circumstances. \n\nThe first time I rented a property as a tenant I very clearly remember a neighbor complaining about how much it cost to replace the rooftop hvac unit when it broke and I was like \u201cwhy didn\u2019t you put a cap on hvac repairs in your lease\u201d. Dudes mind was blown. I know it\u2019s not related to ops question but in my experience a good commercial real estate lawyer will negotiate stuff in your lease like that that you\u2019ll never have thought of that makes them absolutely worth their fee. Ours easily saved us 5x what we paid him within the initial three years. Don\u2019t know if this is normal or not but I felt like our tenant rep did like 1% of the work and our lawyer did 99% - but for some reason the tenant rep got more money.", "replies": [{"id": "gj3de3j", "text": "I\u2019m a broker and I don\u2019t claim to be a lawyer but I\u2019ll negotiate like one. Cap the HVAC expense?Hell yes. Cap operating expense non cumulative? You betcha. Radius clause? I don\u2019t think so. Indemnify ? Sure but it\u2019s mutual. Anyone can find a space, IMO 75% of the brokers job is negotiating the deal.", "replies": [{"id": "gj3dyji", "text": "Yeah I must have just had bad brokers in the past, or to be fair maybe they were doing work behind the scent in conjunction with the lawyer. They all just did tenant rep work so I\u2019d hope they provided some sort of value.\n\nAny tips on finding a good broker or what to ask? It\u2019s just an industry with limited insight and no visible track record/results to look at from a consumer perspective which is aggravating.", "replies": [{"id": "gj3ej2h", "text": "There are good ones and bad ones. Ask them how they plan on selling you to the landlord? Are you an established operator with more than one location? Ok that\u2019s good...ask them how they will leverage that. Ask them about common pitfalls in a lease the average business owner might not know about. It\u2019s cliche, but You need to get a feel from them that they actually care about your  continued operations not just this one deal. \n\nIt\u2019s an inefficient antiquated industry for sure. At some point Jeff Bezos will buy costar, streamline the whole thing and put brokers out of business.", "replies": [], "depth": 5}, {"id": "gknzjjm", "text": "Ask trusted local commercial businesses  who they used. Interview several. A commercial lease is serious business and you should work with someone that is qualified and can both maximize your business\u2019 chance of success and minimize your risk exposure.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "gj0v3jc", "text": "Manage less than 1000sf office-warehouse. Tenant covers common area maintenance. 2-3 year leases, but 1 year deals are not uncommon. No buildout for units or leases this small. 1 month free at most during down periods or rest of month free whenever lease is signed.\n\nWe have our broker find us rent comps on our area every quarter to make sure we are priced competitively.", "replies": [], "depth": 1}, {"id": "gj3541w", "text": "I\u2019m a CRE professional with 26 years experience, and I\u2019m currently the COO/Asset Mgr of a privately-held CRE investment company. We perform all our own services in-house (brokerage, leasing, property Mgmt, asset Mgmt, accounting, construction, etc.).  Many of the concessions you mention vary by market and even sub-market.  In our market, we\u2019re not typically setting the lease structure based on underwriting the prospect like you ask. Different property types usually dictate the specific form of lease doc. Typically, retail leases will be NNN, single-tenant retail properties may be absolute net, Class A office will be modified gross, Class B and C will be full-service gross, industrial will be NNN and so on.  \n\nWhen we\u2019re underwriting a prospect, there is a long list of information we require the broker to obtain from the prospect, but the list can be scaled based on the size of the deal. For example, I\u2019m not really going to get into tax returns and business plans for a relocating nail salon that\u2019s leasing a 1,200 SF retail suite as-is for 36 months at $12.00 PSF NNN. The dollars there don\u2019t warrant it. However, if we\u2019re talking about a national-credit tenant leasing a free-standing 100,000 SF office building for 10 years at $35.00 PSF MG with 2.5% annual increases, six months free and $50.00 PSF in T.I., then that\u2019s a much different scenario. In the first example, my risk is just whether I\u2019ll receive the 36 months in rent plus the leasing commissions.  In the second scenario, I\u2019m risking significant dollars, so the underwriting will be much more involved. \n\nTo answer your second question, I\u2019m not really sure whether improving the process would \u201cunlock\u201d value.  Of course, all processes can be improved. We\u2019re already attempting to transfer as much risk as we can onto the tenant with our standard lease forms, and I\u2019ve trained our in-house General Counsel how to negotiate lease contracts with tenant\u2019s counsel so we can keep the lease doc as favorable as possible  (because we\u2019re the investor/LL, so we have to live with bad/unfavorable lease language).  Sometimes, that\u2019s possible. Sometimes, you have to give a lot that don\u2019t want to. There are many, many ways to structure lease language so it\u2019s favorable to the LL (or, to the tenant, if you\u2019re tenant-rep); however, ultimately, every lease is different, because every tenant is different, every space is different, every property is different, and every market is different.  I\u2019m not sure if that\u2019s the type of information you were looking for. If not, I\u2019m happy to try again.", "replies": [{"id": "gj36x6r", "text": "Impressive write up, appreciate the time it took. I'd be interested in seeing some of the language examples you consider LL or tenant favorable or at least what areas of the lease these most often come up.", "replies": [{"id": "gj39z1k", "text": "The majority of our assets are retail/service, so most of our leases are NNN, but we have them all.  If you\u2019re dealing with a national-credit tenant, they\u2019re going to hit you with all their stock language on the first redline. You may see some of it in the LOI, but there will be much more in the first redline.  Then, you have to build your defense to what they\u2019re asking to add, plus what they want to delete or modify in your lease template.  This assumes they\u2019ll use you our lease form, which we always try to do and usually we\u2019re successful.\n\nRegarding specific examples, I can think of many. Just off the top of my head, I always make sure my people:\n- it\u2019s \u201cdeferred\u201d rent, not free rent. If the tenant goes bad, I want a chance to recover the free rent as damages.\n- always draft Permitted Use clauses in retail leases as narrowly as possible and add \u201cand for no other use\u201d at the end of the clause.  Tenant mix matters, and you don\u2019t want a tenant changing their use, especially if you have lots of tenants with exclusives and/or restricted use clauses. \n- watch exclusives and keep up with them. Also draft \nthem very as narrowly as possible. For example, don\u2019t say simply \u201cTenant has the exclusive right to operate an Asian restaurant.\u201d  Instead, say \u201conly cuisine from the country of Vietnam, and in any case, only to the extent that another tenant\u2019s menu items exceed 25% of the menu items offered by Tenant.\u201d\n- always make CAM caps compound annually. You didn\u2019t want to get caught by annual increases that went, for example, 2.0%, 3.0% and 6.0%. If you had a straight cap (say 5.0%), you wouldn\u2019t be able to recover the full 6.0% in Yr. 3, but you would if the cap was cumulative. \n- don\u2019t believe the conventional wisdom that waivers, indemnification and hold harmless clauses can be purely reciprocal. They can\u2019t. The tenant is in the Premises every day. The LL is not. \n- never agree to a \u201csimple\u201d negligence standard. Always insist on \u201cgross negligence or willful misconduct.\u201d\n- always read the CAM exclusions the tenant\u2019s attorney wants added. Most of them are fine, but the lists are usually long, and you want to make sure they didn\u2019t slip in anything. \n- do the math when the tenant wants to substitute a CAM admin fee for the Mgmt fee. The difference erodes base rent.  Make sure you count the difference as a non-recoverable deduct from your base rent. \n- watch the T.I. like a hawk. If it\u2019s your $ (i.e. an \u201callowance\u201d to the tenant), then you want it invested in long-term improvements to your property (e.g. restrooms) and not tenant-specific finishes (e.g. flooring, wall covering, millwork like check-out counters) that will be demolished when the tenant vacates.\n- related to the above, I have 130+ restaurant tenants, and they bring a whole other level of complexity. They usually totally wear out improvements in 20 years (e.g. sewer lines, mechanical equipment, roofs, grease interceptors, hoods, etc.), so never believe the conventional wisdom that their improvements are assets. The improvement are usually worthless, and most second or third generation tenants need the space laid out differently, so they\u2019re going to gut anyway. \n- watch gross sales monthly and the resulting percentage rent.  Watching monthly will help you see downward trends that could indicate upcoming business failure. \n\nThese are just a few ideas off the top of my head, and I only scratched the surface of those topics. Hope it helps.", "replies": [{"id": "gj4g8w0", "text": "This is excellent, thank you. As a third year PM up for an AM position this will come in handy. My strengths are definitely not leasing or legal so this will help fill in some gaps.", "replies": [{"id": "gj4oqub", "text": "I was a PM for five years and then a broker for 10 years. Both jobs helped me become the asset manager I am now. I definitely recommend doing as many tasks as you can in CRE to get exposure. There\u2019s no degree that will actually teach you everything, right?  You have to learn most of it through experience. Finding a mentor will give you a huge leg up.", "replies": [{"id": "gj4z2kc", "text": "I was a commercial agent for close to 10 years prior but only did sales, leasing is new to me. I've definitely leaned on my network and past experience but there's always room to grow. 100% agree that experience trumps education and that's been my niche, most people want to hide behind a screen", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}, {"id": "gj4mbtc", "text": "Can you explain what you mean by adding the diff b/w CAM admin fee and Mgmt fee as a non-recoverable deduct from base rent?", "replies": [{"id": "gj4r2ba", "text": "Most LLs pay mgmt fees (e.g. property management fees, accounting fees, asset management fees, etc.) based on gross receipts (I\u2019m leaving out construction mgmt fees, financing fees, etc. from this example).  Your goal as an investor and asset mgr should be to transfer as much costs and as much risk as you can to your tenants. Therefore, depending on the lease structure, you should try to asses as much as you can of the management fees to your tenants. For example, if you have a multi-tenant shopping center and you\u2019re paying the PM 5.0% in straight mgmt fees, you include the 5.0% management fee in CAM (sometimes you\u2019ll see it as a separate line item from CAM, but I like it included in CAM so it\u2019s not as obvious). Sophisticated tenants, like most national-credit retailers, zero in on all the usual suspects in your template NNN lease form, and management fees will get slashed in the first redline.  They\u2019ll insert as an alternate a CAM admin fee, usually 15%. Say your gross receipts are $40.00 PSF, so your 5.0% mgmt fee would be $2.00 PSF. If your CAM was $6.00 PSF ($2.00 of which is your mgmt fee, leaving $4.00 PSF for the rest of CAM), then the national-credit retailer will say they\u2019ll pay 15% of your $4.00 PSF CAM, which would be $0.60 PSF. If all your other tenants are reimbursing the 5.0% mgmt fee at $2.00 PSF, and your national-credit is paying the CAM admin at $0.60 PSF, then you\u2019re actually losing $1.40 PSF on the national.  So, if you\u2019re national is paying $30.00 PSF base, I tell my brokers to show the $1.40 PSF loss to full CAM recovery and state the \u201ceffective base rent\u201d as $28.60 PSF.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "gj3a8pr", "text": "Another example just came to mind that\u2019s very timely and relevant to what we\u2019re dealing with today: Force Majeure clauses. No one ever looked at these until the pandemic. Most states don\u2019t have any case law on whether tenants would be excused from paying rent if there was a government-mandated shutdown. Like I suggested before, draft these as narrowly as possible and be specific, like, \u201cIn no case will Tenant ever be relieved from the payment of rent.\u201d", "replies": [], "depth": 3}], "depth": 2}, {"id": "gjb9n46", "text": "I hear you. Every lease structure is varies depending on the factors that you mentioned. However, do you have any general frameworks to making a lease decision? Can you share the long list of information you mentioned for underwriting high value deals? How are you going about transferring as much risk to the tenant as possible? Thanks.", "replies": [], "depth": 2}], "depth": 1}]