Page 4 - eBook-Real-estate-leases

P. 4

Overview: real estate leases

The new leases standard will significantly affect lessees and lessors in the real estate industry, including their
considerations related to non-lease components, initial direct costs, and accounting for sale- leaseback transactions. In
addition, real estate lessors will need to understand the standard’s broader implementation implications for lessees as
well as the potential for changes in tenant behaviors.

Most common forms of real estate leases

The three most common forms of real estate lease are Net Leases, Modified Gross Leases and Gross Leases:
1. Net Leases or triple net lease: A triple net lease (triple-Net or NNN) is a lease agreement on a property where the
tenant or lessee agrees to pay all real estate taxes, building insurance, and maintenance (the three “nets”) on the
property in addition to any normal fees that are expected under the agreement (rent, utilities, etc.). This is where
the tenant pays their share of real estate taxes, insurance, and CAM (“Common Area Maintenance”). Generally,
when the lessee pays the taxes, insurance and CAM fees on behalf of the lessor, these expenses are considered
“variable” and will be excluded from lease payments and expensed as incurred.

2. Modified Gross or Base year leases: This is where the lessee pay their share of increases in real estate taxes, insur-
ance and CAM over a base year amount. It therefore consists of both fixed and variable portions. The fixed com-
ponent will be included in lease payments for real estate taxes and insurance. However, if there is a fixed piece
for CAM this is excluded from lease payments and is expensed as incurred because it is a considered a non-lease
component. The variable piece – i.e., the “excess” amount over base year is excluded from lease payments and also
expensed as incurred.

3. Gross Leases: A gross lease is a type of commercial lease where the lessee pays a flat rental amount, and the
lessor pays for all property charges regularly incurred by the ownership, including taxes, utilities and water. In this
type of lease, the tenants pay a fixed amount which includes all components. In this scenario, the fixed portion
will be included in lease payments for real estate taxes and insurance. As noted before, the fixed piece for CAM is
excluded from lease payment because it is a non-lease component and is expensed as incurred.

1 2 3 4 5 6 7 8 9