to larger transaction values and greater potential tax implications.
in which, in addition to rent, the tenant is responsible for paying all the property’s operating expenses, including property taxes, insurance, and maintenance. Major retail chains frequently choose triple-net leases because they want to control the look and feel of their real estate, especially if it’s a recognizable regional or national brand. For investors, this translates to a low-maintenance income source. LONG-TERM RELATIONSHIPS Nobody likes turnover. Commercial leases are generally longer than residential leases, plus commercial tenants often find it in their best interest to remain long-term occupants of their leased spaces. This is largely because many commercial tenants invest significantly in customizing and outfitting spaces to suit their operational needs, which makes relocation costly and disruptive. Businesses value operational continuity, and consistently relocating can be disruptive to operations, employee commutes, and client accessibility, resulting in a loss of employees, or worse, business. Given the flexible lease terms available to commercial tenants, along with all the other benefits of being a commercial investor over a single-family landlord, it’s easier for landlords to keep tenants happy and cultivate long-term business relationships, without sacrificing their bottom line. •
FLEXIBLE LEASE TERMS Commercial leases have
fewer consumer protection rules compared to residential leases, which are subject to extensive state regulations, including guidelines on security deposits and lease termination. This flexibility allows landlords to creatively structure leases to maximize rents and, in many cases, provide the flexibility tenants need to remain tenants as their businesses grow (or struggle). Rent escalations are a perfect example for maximizing revenue. Instead of offering fixed-rent amounts, landlords can implement periodic rent increases tied to inflation or market rent rates, ensuring the lease remains market-relevant over time. They can also implement “graduated rents,” in which case they offer a low introductory rent to attract startups and small businesses but build in predetermined increases over time. Both of these strategies limit vacancy.
FORCED APPRECIATION Forcing appreciation in real estate refers to actively taking steps to increase the value of a property rather than waiting for market forces to do so. Supply and demand, interest rates, and economic growth are typically the biggest driving forces of single-family appreciation. In commercial, appreciation is often linked to the property’s income-producing potential, as the assets are frequently valued based on income streams. Raising rents, streamlining operations to cut costs, and making physical improvements are all examples of ways to force appreciation. Sometimes, a commercial investor can enjoy forced appreciation without having to spend a dime. Commercial tenants in office, retail, industrial, and other asset classes often sign long-term leases, as location stability is good for business. In some cases, a tenant will spend their own money to modernize a space, upgrade flooring and fixtures, or enhance curb appeal. They do this to benefit their personal business, but the property owner reaps the rewards in the form of forced appreciation. RESPECT FOR THE PROPERTY If you’ve ever been a landlord, chances are you’ve had a problem tenant. Although no asset class is tenant-proof, commercial properties beyond multifamily typically have corporations and businesses as tenants. These tenants often prioritize keeping the property in good condition because it represents their company’s image.
Landlords can also extend exclusivity rights to a tenant,
preventing the landlord from leasing other spaces within the property to a competitor. They can also offer co- tenancy benefits, meaning a landlord offers reduced rents if certain anchor tenants occupy the property, ensuring smaller tenants benefit from the foot traffic or prestige. These are just a few examples of flexible lease terms that allow landlords to appeal to prospective tenants, all while manipulating income streams to maximize revenue.
Paul Mueller, a writer and real estate investor based in Tampa, Florida, is the content director at Best Ever CRE, home of the Best Real Estate Investing Advice Ever podcast. He’s also a contributing writer at Fast Company.
TRIPLE-NET LEASES Many landlords benefit from triple- net leases, which is a lease structure
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