Lease Structure and How it is Calculated
Before you sign on the dotted line underneath that lease agreement ensure you understand what exactly you are getting yourself into by understanding the lease structure.
Whenever a person looks to lease property the first thing that comes to mind is how much they will be paying. Sometimes the amount required is out of expectation.
The question you should then ask the lessee is how they came up with the figures they are presenting to you and what leasing structures they are using. This will help to avoid overpayment or rather being conned.
Full-Service Gross, Modified Gross Leasing and Triple Net Leasing are the three common commercial lease structures that are used.
First, there is the Full-Service Gross (FSG). In this type of lease, the landlord pays the operating expenses of the property. This is the simplest of the three types and many landlords prefer it because it is not as complicated as the other two. Here the lease covers all expenses.
The tenant will pay rent to the landlord and the landlord pays all other expenses on the property. These expenses include common area maintenance, utilities, insurance and property taxes. In such a case within the lease agreement, it will be stated as Ksh.5000 per square foot full service.
Many prefer this type of lease because it is very simple to understand i.e. the tenant pays the rent and the landlord pays for the expenses.
Second, there is the triple net lease. This is the opposite of the Full-Service Gross. In this lease structure, the tenants pay the rent in addition to the operating expenses for the building. The operating expenses include property taxes, common area maintenance and insurance.
In this case, the lease agreement will be stated as Ksh. 3000 per square foot with Ksh. 5000 in pass-through.
Lastly, there is the Modified Gross Leasing. This type of leasing is a combination of both the Triple Net and Full Gross Lease. Here both the landlord and tenant pay the operating expenses of the property. In the MGL it is not clearly stated who pays for what. This means that the landlord may pay the property taxes while the tenant pays the insurance and common area maintenance. This type of lease is very complicated because there is no limit as to how a person can come up with such a lease.
This type of lease is usually stated as Ksh.7000 per square foot plus tenant’s pro rata share of CAM (Common Area Maintenance)
So before you sign on the dotted line underneath that lease agreement ensure you understand what exactly you are getting yourself into by understanding the lease structure.