Are you looking at your snowremoval bills from the last couple of months and thinking,
“Ugh, how am I going to recover from this big expense?”
Let me tell you: There is away to avoid having to “recover” by better planning when you start the leasing
process. Using a concept called, “Net Lease”, landlords and tenants share costs. You start by implementing a smoother budgeting process, conducting transparent year-end reconciliation and creating a more efficient lease cost strategy.
Under the typical Gross Leasestrategy, the landlord makes a best guess on expenses each year and their
bottom line takes a hit for any extraordinary costs that year. So, typically, they err on the side of proactively covering their potential costs in any given year.
Back to the question above, thisis something that Landlords with Gross Leases are saying right now. Let’s break
it down a little more. With Net Leases, Tenant and Landlords share in the cost of seasonal or unexpectedly heavy expenses.
There are many other reasonsto establish the Net Lease which uses a fair and equitable cost-sharing
strategy. Four of the main reasons are: Transparency, Incentives, Efficiency,
and Proactive Budgeting.
- Transparency:Your tenant is likely wondering about the actual cost of running the property, thinking
the Landlord is making tons of cash. In a Net Lease, costs are disclosed and auditable. It is a great way to establish trust and get feedback on services from your tenant because now they have skin in the game. - Incentives and Efficiency: With a Gross Lease, every operating dollar comes offthe Landlord’s bottom line which drives the behavior to err on the side of doing the minimum, the cheapest, the amount to get by for now. With a Net Lease, there is more incentive to do what is expedient and efficient to solve the problem before it becomes more expensive. The actions are justifiable and auditable.
- Proactive Management: With a Net Lease, budgeting is critical and goodbudgets are built from good record keeping and historical data. Here’s an example: Back-flow prevention in the plumbing system is inspected every year. After five years, a rebuild is required and you should build in the cost for the year the work will be completed. Other items can go for years without attention, but eventually need repair or replacement (roofs, parking lots, etc.). A Net Lease is the catalyst to building a historical management philosophy.
There are many advantages of the Net Lease format that make your life easier in the long term. It provides
transparency that establishes trust with your tenant. It promotes incentives to fix a problem properly in a timely manner to avoid downtime and emergency cash. It establishes a budgeting process that leads to better expense estimates and smoother, more predictable cash flows.
Here is some good news!
Your business has alreadyestablished everything you need to make the transition to Net Leases, so
there’s no up-front cost to do it. We can help Landlords with lease template and budget reconciliation examples. If you are a tenant, we can help you understand how lease charges and credits benefit your bottom line.
If you would like more information on how this strategy would work for you, please reach out to me at 612.812.7305 or John@wavecommercialconsulting.com
Wave Commercial Consulting:We make your real estate work better.