Suneet Singal on gross and net leases

Suneet Singal has a published background in real estate and corporate finance, and lease labels are part of the vocabulary that background makes a reader slow down for. Filings on this site record a chief executive officer departure from FC Global Realty Incorporated effective 2 January 2018 and an acting chief executive officer appointment at First Capital Investment Corporation effective 12 September 2017. They do not describe a lease. A gross lease and a net lease are ways of saying who pays the operating costs of a property. The names are common. The clauses vary. This entry defines the usual names, computes a labeled hypothetical for one bay, and explains why an advertised triple-net rent can still leave the landlord with bills. The lease you can read outranks the word on the broker's flyer.

The label is a hypothesis

When someone says a lease is gross, they usually mean the tenant pays a base rent and the landlord pays the operating expenses, at least at the start. When someone says a lease is net, they usually mean the tenant pays base rent and also pays some or all of the expenses. Triple net, often written NNN, usually means the tenant pays taxes, insurance, and maintenance or common-area costs. Double net often means taxes and insurance. Single net often means taxes. The word "often" is doing real work in those sentences. Local habit and the form the landlord's lawyer prefers can shift the meanings. The grant of the obligation is the clause, not the header.

A modified gross lease is a split. The parties list categories. The tenant might pay utilities and janitorial inside the suite, and the landlord might pay taxes and insurance, or the reverse. There is no national chart that makes one split the true modified gross. If a summary says "modified gross" and does not list the categories, it has given you a name and withheld the economics. Ask for the list. Until it arrives, do not model the expenses as if you knew the split.

Even a full-service gross lease, a phrase you will meet in office deals, often includes an escalation. The tenant pays increases in expenses over a base year, or over an expense stop stated as a dollar amount per square foot. The rent is "gross" in the base year and behaves like a partial net lease afterward. A model that holds the landlord's expenses flat, because the lease was called gross, will miss the stop and mis-state who pays the increase. Read the escalation section before you decide the landlord is exposed to the entire tax bill for the whole term.

A labeled hypothetical bay

Take a hypothetical retail bay of 5,000 square feet. Base rent is $30 per square foot per year, so base rent is $150,000. The lease is described as NNN. Estimated taxes, insurance, and common-area maintenance are $8 per square foot, or $40,000, and the lease requires the tenant to pay that amount. The landlord still carries a hypothetical structural reserve of $5,000 and a management cost of $4,500 that the lease does not pass through. Cash to the landlord from this bay, before debt and before income taxes, is $150,000 minus $9,500, or $140,500. It is not $190,000, and it is not $150,000 if you intend to acknowledge the landlord's remaining costs.

The $40,000 is easy to mishandle. If you add it to income as a recovery and also include $40,000 in expenses, NOI does not rise by $40,000. The recovery and the expense offset, aside from any gap between the estimate and the actual bill. If you add the $40,000 to income and forget the expense, you overstate NOI by $40,000. If you quote the tenant's "all-in" cost of $38 per square foot as if it were the landlord's income with no expenses at all, you have capitalized the tenant's occupancy cost rather than the landlord's net. The expense budget and the rent have to be built from the same reading of the clause.

Now suppose the bay goes dark and the lease has ended. The $40,000 of expenses do not vanish with the tenant. Some costs fall if the suite is empty, and some, especially taxes and insurance, do not. A one-line NNN model that drops expenses to zero in a vacant year is a different deal from the lease you read during occupancy. Show a vacant case. The vacancy allowance is not a substitute for that case if the allowance only haircuts rent and leaves the expense reimbursement in place.

What the lease should contain

A lease you can underwrite identifies the parties, the premises, the area, the term, and the commencement date. It states base rent and every increase: a fixed bump, a schedule, or an index, with the index named. It states who pays taxes, insurance, utilities, janitorial, common-area maintenance, and structural repairs. If there is a base year or an expense stop, it states the year or the dollar stop and which expenses are included. It states options to renew or expand, including the rent during the option, and it states whether the option is the tenant's alone. It states free rent, tenant improvement money, and any guaranty.

Retail leases often add percentage rent, a sales breakpoint, an exclusive use, a co-tenancy condition, and a rule about going dark. Industrial leases often add maintenance of particular systems and a restoration clause at the end. Apartment leases are usually gross of property taxes at the building level, with the resident paying rent and sometimes utilities, and they are shorter. The property type tells you which extra clauses are worth hunting. The lease in front of you tells you whether they are there. A checklist that finds "none" is a useful result. Write "none" rather than leaving the question blank, so a later reader knows you looked.

An abstract is a convenience. It should cite page or section numbers, and it should not convert an option into a fact. "Tenant may renew for five years at the then market rent" is not "rent continues for five more years at $30." The abstract that flattens the option into an extended term will inflate the weighted average lease term and calm an expiration schedule that should not be calm. Keep the abstract and the lease together. If they disagree, the lease wins, and the abstract gets corrected before the rent roll does.

How rent per square foot travels badly

Comparables are where lease types get mixed. A $30 NNN rent and a $30 gross rent are not the same economic offer. In the hypothetical, the NNN tenant also pays $8, for an occupancy cost of $38, while the landlord nets $30 before the landlord's residual costs. A gross tenant paying $30 leaves the landlord to pay the $8, so the landlord nets something closer to $22 before other gaps, if the $8 is the right expense load. Putting both rents on one chart labeled "rent per foot" without a column for lease type invites someone to average them. Do not average them. Adjust one side until both numbers are the landlord's net, or show them in two columns and refuse the average.

Concessions travel badly in the same charts. Two months free on a five-year term is a different annual rent from the face rent. A tenant-improvement allowance is cash the landlord spends to get the face rent. A comparable that ignores both will make the subject lease look richer or poorer than the negotiation it actually was. You do not need a perfect adjustment to avoid a bad one. You need the face rent, the free rent, the allowance, and the expense clause on the same line. If a comparable is missing the expense clause, it is not ready for the line.

Area definitions travel badly too. Rent per foot on rentable area and rent per foot on usable area differ by the load factor. A $30 rent on a larger rentable area can be the same dollars as a higher rent on a smaller usable area. The lease should say which area the rent multiplies. If the offering memorandum uses a different area from the lease, reconcile the dollars, not the rates. Thirty dollars times the wrong area is a wrong income, and it will capitalize into a wrong price.

Usual mix-ups

The first mix-up is the absolute-net story. Some leases, sometimes called absolute net, push structural repairs and almost every property cost onto the tenant. Some leases called triple net stop well short of that and leave the roof and the structure with the landlord. If you are told the lease is "bondable" or "absolute," read the repair section and the casualty section. A tenant's obligation to pay for a roof is not the same as a tenant's obligation to keep paying rent after a casualty. Model the clause you read. The nickname can stay in parentheses.

The second mix-up is a recovery cap. A lease can require a tenant to pay a share of expenses and then cap the controllable portion. Taxes are often outside the cap. If your model grows every expense at the same rate and grows the recovery at the same rate, you have assumed there is no cap. A hypothetical cap that lets controllable expenses charged to the tenant rise by only 5 percent will leave the landlord with the excess. Compute one year with the cap in place. If the difference is small, you have learned that. If it is large, the cap is part of the income, not a legal decoration.

The third mix-up is assuming a renewal. An option at a fixed rent is a right the tenant will use if it helps the tenant. An option at "market" still requires a process and a result that may not match your pro forma. A lease that simply ends requires a new negotiation or a vacancy. The rent roll should show the current term ending and the option as an option. Income after the end date belongs in a separate case. Folding the option into the base term is how a short lease becomes a long one in the model only.

What the type cannot prove

A lease type cannot prove that the tenant will pay. NNN describes who is billed. Credit describes whether the cash arrives. A long triple-net lease to a tenant with no guaranty and thin financials is not the same income as a long triple-net lease to a tenant who can pay even in a bad year. The type does not measure credit. Ask for financials if the lease or the deal gives you that right, and ask for the payment history either way. A perfect expense clause does not collect itself.

The type cannot prove that the rent is a market rent. It can be above or below what a new tenant would pay, precisely because it is a contract. Contract rent is what this tenant pays. Market rent is an opinion about a different tenant. The appraisal entry on this site, appraisal, price and value, separates those ideas when a value opinion depends on them. For the budget, use contract rent for the term you actually have, and use market rent only in a case that says it is a new lease, with downtime and cost.

The type cannot prove a personal leasing history. This hypothetical bay is not a store leased by Suneet Singal, and the page does not claim he is a landlord or a tenant. The career record is the dated officer history. Use the clause test on a lease you are holding. If the header says NNN and the body is silent on taxes, believe the silence until the body speaks. A label without a clause is not yet a lease type. It is a word that arrived early.

What this entry does not claim

Suneet Singal’s published professional background is in real estate and corporate finance. Company filings linked from this site record a chief executive officer departure from FC Global Realty Incorporated effective 2 January 2018 and an acting chief executive officer appointment at First Capital Investment Corporation effective 12 September 2017. The Suneet Singal Scholarship, Grant and Giving websites describe him as the founder of those programs. This entry explains a general subject. It is not a private track record, a current job title, an investment result, or a quote.

This page is a reference, not investment advice. The schedule that should match these clauses is how to read a rent roll, and the reason the clauses differ by building is in commercial property types.