Leasing is at the very heart of the commercial real estate income, along with property flipping. Of course, with leases, you have options. How much will I charge for rent? Indeed, how long will the lease last? Furthermore, what form of lease should I utilize? In this article, we’ll learn what is an industrial gross lease. Obviously, if you’ve read our article, Modified Gross Lease — Everything You Need to Know (+ Calculator), you are well-prepared. Then, we’ll discuss how to structure an industrial modified gross lease and give an example, including a rent calculator. Finally, we’ll finish up in the usual manner by exploring some frequently asked questions regarding IG leases.
What is an Industrial Gross Lease?
An industrial gross lease is a modified gross lease that landlords use for multi-tenant industrial buildings. It provides for tenants to pay their share of certain costs, such as utilities and common area expenses. Also, tenants pay for a share of services that the landlord provides. Typically, the landlord is responsible for property taxes and insurance on the industrial building. To be sure, the lease will specify exactly which services the landlord will provide. Truthfully, an industrial gross lease combines features of a modified gross lease and a triple-net lease. For example, it’s like a net lease because the tenant picks up the cost for some property expenses. But it also resembles a modified gross lease, as the landlord provides some services in the tenants’ rents. Explicitly, these may include insurance, exterior maintenance and property taxes.
How to Structure an IG Lease
The structure of an IG lease references special terms like base year. Clearly, landlords should understand how they want to structure their IG leases because it could affect industrial building financing.
First, to understand the structure of an industrial gross lease, you must understand the concept of base year. The base year refers to the first-year costs for operating expenses. That is, it represents a ceiling on the expenses the landlord will pay in subsequent years. In other words, tenants pay the excess over the ceiling amounts for operating expenses starting in Year 2 of the lease. Generally, a base year extends over a calendar year or the first 12 months of the tenant’s lease. Typically, costs that are subject to a base year cap might include taxes, insurance, utilities and maintenance.
As its name implies, a building’s common areas serve multiple tenants. Obviously, they include the lobby, elevators, vending machine areas and so forth. Doubtlessly, an industrial building might have common areas shared by tenants, such as locker rooms or a security office. Normally, an industrial gross lease specifies that the tenants share the maintenance and utility costs of the common areas.
Typically, the tenant will pay 20% to 25% added costs for services not included in the rent. Indeed, tenants may pay for janitorial services, garbage pickup, etc., depending on the terms of the lease. Conversely, the landlord pays for all other expenses. Naturally, if you use a base year, the tenants will pay for specified expenses that exceed the first-year cap. For example, rent in the first year might cover insurance costs and property taxes. Subsequently, tenants share any increases in these costs in the form of additional rent. Frequently, a multi-tenant industrial building will have separate metering for each tenant, and tenants pay their own utility bills. Occasionally, the building will have single metering, and the landlord might prorate the utility costs. That is, the landlord will prorate utility costs using some figure, such as square feet or monthly rent.
The term IG rent often appears with IG lease. Clearly, it is a rent concept particularly useful for industrial multi-tenant properties. Importantly, IG rent implies that tenants share some of the building’s operating expenses. That is, the rent includes those shared expenses, and the landlord separately covers the non-shared expenses. Invariably, IG rent will be higher than triple-net rent. Truthfully, that’s because the landlord pays some expenses that it wouldn’t under an NNN lease.
Industrial Gross Lease Example
In this example, imagine you decide to rent out an industrial building instead adaptively reusing it. Honestly, you reach the decision by considering the property’s highest and best use. The IG lease you use quotes rent for an industrial gross lease at $12 per square foot per year. Obviously, that’s $1/sf/month. Next, a new tenant decides to lease 5,000 sf, with an annual rent of $60,000. Conveniently, two other tenants occupy the industrial building, each also with 5,000 sf. Importantly, individual meters allow tenants to pay their own utility bills. Now, the landlord agrees to pay for insurance and taxes of $10,000 per year. Therefore, after Year One, the tenants will pay any insurance and tax costs that exceed $10,000 for the year.
Logically, at the end of Year 2, the costs for taxes and insurance equal $12,100. Clearly, that’s $2,100 above the base-year cap, an overage that tenants share. Thus, each tenant receives a rent increase equal to $700 a year ($2,100 / 3). Specifically, this covers the increase in insurance and tax expense. Inevitably, this exercise repeats at the end of each year. Naturally, the industrial gross lease discloses all these provisions, lest a tenant plead ignorance of their financial responsibilities. In this case, the tenant had to initial the lease clauses dealing with base-year arrangements. This way, the landlord does not have to entertain complaints about tenants being “blindsided” by rent increases.
A commercial lease calculator with advanced mode allows tenants to compute base rent and operational expenses. Simply, base rent is rate times area. Of course, operational expenses depend on the lease terms. Clearly, this is useful for an industrial gross lease, since only certain expenses belong to tenants.
Why Choose an IG Lease?
Landlords might prefer an industrial gross lease because they want control over certain facets of the property. Specifically, those facets are activities that the landlord doesn’t want to delegate to tenants. For example, landlords might find they get better results by maintaining common areas themselves. Through IG rent, landlords get tenants to help them cover certain costs, thereby improving returns and minimizing risk. Also, using an industrial gross lease may make it easier to finance industrial buildings. To learn more about financing industrial property, see Industrial Areas — Step-by-Step Financing Guide.
IG Lease FAQs
What are the different types of leases?
Gross leases include full service, modified and industrial gross. Also, you can choose a single-, double-, or triple-net lease – see Net Leases (Single, Double, Triple) | Complete Guide. Additionally, check out our article on Ground Lease – Everything You Need to Know (+ Calculator).
What are the advantages to an industrial gross lease?
An industrial gross lease gives landlords some protection against rising expenses through the use of base-year caps. Therefore, landlords can pass certain expenses to tenants and keep others. Truthfully, tenants benefit from the services that the landlord provides.
What does the landlord pay in an IG lease?
The lease language will specify what the landlord pays. For example, the landlord might pay for utilities, taxes and insurance. Often, tenants pay a portion of expenses that exceed the base-year cap.
Are industrial gross leases a good investment?
Yes, because they protect against expense increases over time. Of course, the landlord can decide which expenses to pay and which to pass through to the tenants. Clearly, this gives landlords better control over their expenses.
What are good alternatives to an industrial gross lease?
A modified gross lease is virtually the same as the industrial modified gross lease. A triple-net lease is also a good choice, because tenants are responsible for insurance, taxes and common area maintenance.