Lease Management Structures | Hokanson Companies

The Importance of Choosing the Right Lease Structure

For any enterprise, selecting the ideal lease structure is critical in managing a commercial real estate portfolio. The lease structure determines how rental costs are calculated and influences the overall lease management strategy. Making the right choice can help businesses in many ways, like:

Improves Budgeting & Operating Costs

Managing operating expenses is another key consideration in a lease management strategy. It’s necessary to understand how the lease structure impacts the rent payment and other costs, including utilities, maintenance, and any capital costs laid out in the lease agreement.

For example, in triple-net lease structures, tenants are responsible for covering property taxes, insurance, and maintenance costs. If not adequately factored into financial planning, this could drastically affect the bottom line.

Future Growth & Flexibility

Beyond costs, leases also impact a business’s capacity for growth and flexibility. Lease incentives, tenancy clauses, and options for expansion or contraction can provide the flexibility a dynamic business requires.

By collaborating with a real estate team, clients can structure leases that anticipate future needs and growth. Choosing between a short-term lease with higher rent or a long-term lease with lower rent, for example, may depend on projected enterprise growth and the likelihood of needing more space.

Mitigates Risks

Specific lease structures expose tenants to financial risks, from unexpected repair costs to the ebb and flow of real estate market prices. With the proper lease structure, you can mitigate some risks and prevent unwanted surprises from impacting your business. Understanding these risks upfront is the key to a stable property lease management strategy.

Types of Lease Structures

There are several types of lease structures, each with its own set of implications for operating costs, risk, and flexibility. To make the right lease management decisions, businesses must understand each model.

Fixed Lease Structures

In a fixed or standard lease, tenants pay a set amount of rent each month, regardless of the property’s operating expenses. This structure offers comprehensive budgeting, as tenants are shielded from increases in utilities, taxes, or maintenance costs. However, this predictability often comes at a higher lease cost than other lease types.

Net Lease Structures

Under a net lease structure, tenants pay a base rent and some operating expenses. The expenses the tenant is responsible for can vary, offering a balance between cost and predictability. This structure can be advantageous if tenants manage these expenses more effectively than the property owner.

Gross Lease Structures

Gross and modified lease structures offer a middle ground between fixed and net leases. In a gross lease, the tenant is responsible for the entire lease life cycle. However, the tenant only pays a portion of the operating expenses under a modified gross lease. This partial responsibility allows for cost savings balanced with greater predictability than a net lease.

Triple Net Lease Structures

A triple net lease places the most responsibility on the tenant. In addition to paying rent, tenants are also responsible for the property’s taxes, insurance, and maintenance. This structure may offer the lowest base rent, but it also exposes tenants to the most financial risk, making it crucial to include this lease management strategy in the overall business risk assessment.

Manage your property’s operating costs with Hokanson’s capital planning and budgeting services.

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Strategies to Manage Operating Costs Using Lease Structures

Hokanson provides the best strategies to reduce operating costs. One such strategy is effectively managing lease structures. With well-crafted lease structures, businesses can control operating costs and drive efficiency in commercial real estate operations.

Switching Lease Structures

Deciding when and why to switch lease structures largely depends on your business’s needs and circumstances. Factors to consider include financial position, budget for property-related costs, and overall property lease management strategy.

For instance, a fixed lease might be a smart move if a company has recently cut down its operating expenses and wants to avoid unpredictable costs. Conversely, a triple net lease could be more appropriate if the company is in a strong financial position and wants to invest while also shouldering some property expenses.

Understanding the entirety of the lease life cycle and the current market conditions can also provide valuable insights when switching lease structures.

Understanding Your Lease Terms and Conditions

Comprehending your lease terms and conditions is crucial to managing operating costs effectively. Key terms impacting your operating costs include base rent, common area maintenance (CAM) charges, and pass-through expenses.

Base Rent: This is the core cost of leasing the property. It is usually fixed and agreed upon before the lease begins.
Common Area Maintenance (CAM) Charges: These are fees payable by tenants for the preventative maintenance of common areas, such as lobbies, elevators, and parking lots.
Pass-Through Expenses: These are expenses that the landlord passes onto tenants and can include property taxes, insurance, and maintenance fees.

A thorough understanding of the lease terms and conditions, combined with effective lease management software, can help business owners plan their budgets accurately to avoid financial surprises in property lease management.

Identify Operating Costs

Identifying operating costs is another critical step when managing commercial leases. Common costs include:

Utilities: This includes electricity, water, and gas expenses, depending on the lease terms.
Property Taxes: These are based on the property’s value and location and are often passed to the tenants.
Insurance: Depending on the lease agreement, businesses may be required to carry various insurance coverages.
Maintenance: This includes costs to keep the property functional, safe, and attractive.

Use Benchmarking Strategies

Benchmarking strategies are an effective way to manage operating costs. By comparing your costs against industry standards, you make sure your business is receiving fair lease terms and isn’t overpaying.

For example, sophisticated lease administration software allows you to compare your lease data against industry norms. With this data, businesses can make informed decisions about their lease agreements and rent payment terms, allowing them to negotiate better rates with property owners.

To implement these strategies, it’s important to partner with an industry professional who can help you get the most out of your lease structure—that’s where Hokanson Companies comes in.

Make the Most of Property Lease Management With Hokanson Companies

Hokanson provides property lease management services to improve operating costs specific to your lease structure. Our expertise in commercial real estate allows us to adeptly resolve your leasing concerns.

Trust in Hokanson to efficiently manage your property leases for both cost-effectiveness and peace of mind in navigating commercial real estate leasing. Get in touch with us today to begin.