We have covered significant ground in this series of articles on leasing.
In this final article, we are going to examine a case study where we look at the high points of a recent lease I completed.
Our case study is for a 7,500 square-foot industrial building in the Napa Valley used for the production and storage of wine as well as retail sales, tasting, events and an office. I have withheld any identifiable features from our discussion for privacy.
Basic lease terms of “NV Wine Co.”
The executed lease for the property is for five years at $12,375 per month base rent and adjusts three percent annually.
The lessee (also known as the tenant) retains the right of two, five-year options to extend. The rent adjusts to market rent at the start of each five-year period as well as annually.
I used the AIR CRE Standard Industrial/Commercial Single-Tenant Lease-Gross form of 31 final pages, which may seem like many pages to read, but I recommend the lessee and lessor (also known as the landlord) take the time to familiarize themselves with its contents.
The not-so-apparent lease terms
Condition, warranty, and maintenance
Often, a property is leased in “as-is” condition, but this does not relieve the lessor from obligations. The lease allows for all building systems to be operational and the roof free of leaks.
Additionally, the lessee is provided a one-month warranty on all the building systems and six month’s on the heating, ventilating and air conditioning systems with the lessor responsible if a problem arises and after that the lessee is responsible.
The maintenance and repair of the premises is the responsibility of the lessee usually except for the roof system, foundation and bearing walls, which are the lessor’s responsibility.
Payment of taxes and insurance increases
The lease allows for the lessee to reimburse the lessor each year the increase in the lessor’s insurance premium and property tax expenses.
The base year cost for these items are established at the lease commencement date, and as these expenses increase each year the lessor will collect the difference from the lessee, which could be a nominal amount, but the lessee should pay particular attention to the lessor’s property taxes if the building is sold.
If the lessor has owned the property for decades, the property taxes could be low because in California taxes are calculated on the building value when purchased with annual nominal valuation increases each year.
When the property is sold, it is reassessed, and, in our case, could result in a $30,000 increase in annual property taxes becoming the responsibility of the lessee. So, in our lease, we made provisions to lessen the impact.
With the lease agreement being 31 pages, I am barely scratching the surface, but I hope our discussion brings to light the complexity of a commercial lease and the need to thoroughly understand what you are signing.