Commercial Leases: Which Kind Is Right For Your Deal?

Let’s take a quick look at the four most common types of commercial leases: gross, modified gross, triple net, and bond lease. Which one is right for the deal you’re trying to complete?

Gross Lease

Common especially for office buildings, in a gross lease, expenses in the operating category such as trash collection, janitorial, utilities, landscaping or management fees are typically picked up by the landlord.  While operating expenses under a gross lease are often picked up by the landlord, beware of terms such as an expense stop, aka a limit imposed on the amount of such expenses paid by the landlord and that sends any costs over that stop to the tenant.  This “stop” can be calculated in a variety of ways, but often you’ll see terms that use the historical expense profile of the property in previous years (sometimes called “base year”) used as the amount that the landlord will be paying — and no more than that.

Modified Gross Lease

Often this type zeroes in on utilities and janitorial expenses and passes them to the tenant.  This type of lease is often used  for businesses with extreme needs for electrical power or for tenant operations that require direct control and/or exclusive use of HVAC, and so tenants will accept the maintenance costs for HVAC. Expense categories are by no means boilerplate, meaning what constitutes tenant costs vs what constitutes landlord costs are subject to negotiation.  Concepts like CAM (common area maintenance) charges are fungible: they might be broken out into sub-categories for the purpose of isolating costs so that they can be assigned to specific tenants.

Triple Net Lease

In gross leases, the tenant pays its share of operating expenses usually calculated by a “base year” calculation, with payment limited to certain operating costs.  The triple net is where the tenant is on the hook for 100% of operating expense of the tenant’s share of the space. Costs commonly include the big three (aka the “triple” in “triple net”): property taxes, insurance and common area maintenance (CAM). Commonly used in retail centers, the triple net lease can result in lower rent payments but with operating expense charges added in, comparisons to gross leases on comparable properties can result in similar total payments. Sometimes called the “hell or high water” lease, the triple net still usually doesn’t send 100% of building costs toward the tenant: very commonly, the responsibility for rooftop maintenance and the structural integrity of the building are the responsibility of the landlord.

Bond Lease

The most unusual of the four lease types, bond leases go further than triple net in assigning costs to tenants.  The responsibility for maintenance and replacement if necessary, of building systems, roofing, exterior and structural components of the building can be assigned to the tenant under a bond lease, in addition to the obligations under a triple net lease.  Even further, a bond lease can assign to tenant capital expenses and tenant improvement costs. Under a bond lease, if the building falls down, the tenant is likely on the hook for rebuilding it.  Bond leases are typically used for single-tenant properties and situations where financialization of the lease is a priority — the tenant being responsible for nearly everything associated with the property’s operation and continued existence means the lessor’s position is about as liquid as it gets in commercial real estate.

(Reference: SIOR Glossary of Real Estate Terms)

Read Up On Commercial

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02. October 2015 by Wayne Grohl
Categories: Leases | Tags: , , , , , , | Leave a comment

What To Expect From LiquidBricks



We’re one day away from a “revolution of the global real estate market,” promises LiquidBricks, a bleeding-edge technology based startup with very interesting financial engineering ambitions.

I first learned of LiquidBricks while reading Commercial Observer’s coverage of Wall Street’s most recent efforts to securitize commercial property leases.


Some quick background: securitization is the name for the act of taking an illiquid asset, or a group of them, and packaging them for sale and resale as a security, usually a bond.

Mortgage-backed securities are a classic example of securitization, and in the residential real estate space, have earned a terrible reputation as a means to mix bad credit in with good credit, with the potential to bring the global economy to its knees, as was done in 2007-2008.

In the commercial space, securitization of mortgage debt hasn’t earned the same lousy reputation, and commercial mortgage-backed securities are not associated with scorched earth in the way their residential cousins have been.

In that light, Wall Street has been working on applying securitization principles to commercial real estate.  One of today’s goals for the Street’s “financial engineers”  is to apply securitization not just to debt incurred in the financing of commercial property, but to commercial leases themselves.

The idea is to create pools of like-kind leases and treat them like bonds – putting the combined leases up for sale on the open market packaged as one instrument.

Leases Aren’t Mortgages, So How…?

The big problem with this is the fact that commercial leases are far more than just payment schedules.  They are not financial instruments as much as they are sets of conditions and rules that underpin a living, working, productive business. One lease does not fit all retailers, one set of clauses that works for one warehouse project is completely inappropriate for another, et cetera. Some experts say that efforts to securitize assets in commercial property belong under the umbrella of CMBS and not lease securitization.

“The CMBS market is very hot. I’m not sure why now would be the right time to” securitize leases, said Stijn Van Nieuwerburgh, director of the Stern Center for Real Estate Finance Research at New York University.

Mr. Van Nieuwerburgh said that while securitizing commercial leases is theoretically possible, he fails to see the “business logic” behind it and questions the appetite for these exotic investments.

“Why on earth would they invest in these commercial lease securities if they could invest in CMBS instead?” he said. “I don’t see what kind of need this addresses that CMBS does not.”

Enter The Blockchain and “Smart Contracts”

At a technical level, the problems posed by the marked differences between commercial leases are problems of standardization. Commercial rent income flows are conducted according to a schedule and are often variable subject to the terms of the lease.  What if there was a way to make the rent flows as well as the rules embedded in the lease part of the same automated financial system, creating predictability and transparency in sufficient amounts so that the lease could be packaged as an investment vehicle?

This seems to be the key idea behind LiquidBricks. In the same Commercial Observer article, LiquidBricks (founder: Luigi Boschin) Chief Technology Officer Dan Doney  talks about using the “blockchain“, a kind of public and irrevocable digital ledger, to create self-executing or “smart” contracts.  If a commercial property’s lease arrangements are conducted in a currency that uses the public blockchain as a ledger and can define its rules in a programmatic way so that when X condition is met, Y adjustment is applied to the income flow (also automated), it becomes possible to introduce liquidity where there was none before. Fast transference of ownership and similarly fast alterations of income flow become possible. Lease terms that are unlike can, in theory, be treated as similar terms, clearing the way for packaging and resale.

“Liquid bricks”, indeed.

When LiquidBricks launches, we should expect hype, skepticism, and confusion. We should expect a lot of caution surrounding the carefully-crafted leases that the industry runs on. The blockchain technology proposed to be used here is the same that powers the alternative currency Bitcoin, and Bitcoin is still not ready for prime time.

But also expect the bleeding edge of financial engineering to call upon us to challenge our imaginations and question long-held assumptions.  The only thing we shouldn’t expect in the long run is for commercial real estate’s financial instruments to escape the evolutionary pressures of technology or financial engineering. The only constant is change.

29. September 2015 by Wayne Grohl
Categories: Leases | Tags: , , , , | Leave a comment

Commercial Real Estate News Roundup for September 28, 2015

Riding a grocery cart to riches, a $1 trillion milestone in multifamily, a Japanese history lesson, and Fannie likes green.  All this and more in the Commercial Real Estate News Roundup for September 28, 2015.









28. September 2015 by Wayne Grohl
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“Building Distress” — And How NYC Models It Using Data

Residential apartment building in Harlem, NYC ...

In the multifamily building, operational problems can go hidden for a very long time, affecting performance for owners and managers as well as quality of life for tenants. If there’s one thing technology has done to commercial real estate, it has been to expand the amount and variety of information that can be captured about a property, all with the idea of revealing such problems.  A significant portion of the new tools and techniques for information collection are there for the use of managers and owners — capabilities ranging from smart meters for water and electricity usage to using software to shape the ideal mix of amenities.

To get a great update on the state of building data collection sensors and other items that fall under the “Internet of things”, check out this excellent free webinar from Chad Curry, Managing Director of NAR’s Center for REALTOR® Technology.

Technology’s giant impact on the commercial property industry means government is also in the business of collecting information on property performance.  As various governmental departments of New York City have recently demonstrated, it’s a task at which they can excel.

NYC Does Numbers

City agencies in NYC compile a great deal of information about commercial properties of all kinds, and in the multifamily sphere, they tend to focus less on economic performance and more on health and safety concerns. What’s worth noticing here is the degree to which these previously far-flung agencies are now actively sharing data, leading to new categorizations that affect, or potentially affect, landlords and managers.

Tenant complaints, court outcomes, code violations, liens, foreclosures — in the past, all were collected separately and stayed in separate piles.  That era is over.

“Building Distress”

Knitting together these categories of information under a single governmental warehouse is the Mayor’s Office Of Data Analytics (MODA) and the Department of Housing Preservation and Development (HPD).  One key result of all this collection and focus on the entire profile of a multifamily property is the notion of “building distress”.

An eye-opening blog post about this process and about “building distress” was published at DataLook’s blog,   The fundamental takeaway should be a wakeup call to owners and operators of multifamily property.  The technologies and techniques being used in NYC are in no way solely the domain of huge cities.  Which means that no matter where you own, your relationships with local government could soon enter a phase where scrutiny of your property is going to be informed by more history of that property than has ever been mustered at any one time.

24. September 2015 by Wayne Grohl
Categories: Multifamily | Tags: , , , , , , | Leave a comment

Commercial Real Estate News Roundup For Sept. 22, 2015

Cover of "Office Space (Special Edition w...

Trump does Bali, the Fed hits the snooze button, European commercial investment levels are dropping jaws, and just what does three hundred bucks a square foot get you in Manhattan?  It’s all here at the Commercial Real Estate News Roundup for September 22, 2015


  • The Verdict on Higher Interest Rates, Commercial Property Executive, September 17, 2015 – Inflation refuses to rear its head, and the Fed doesn’t want to tug on the dragon’s tail. But last week’s vote to keep rates where they were was the first in recent memory that wasn’t unanimous.
  • What’s Driving a 25% Increase in Commercial Construction, BISNOW, September 17, 2015 – A construction giant announces nonresidential starts are exceeding those of housing.
  • The $1 Trillion Idea, Commercial Observer, September 16, 2015 – Read this all the way through for an update on the state of securitization of commercial RE. Spoiler alert: Uh oh, Wall Street’s getting “innovative” again.
  • Moody’s Report Is Raising Concerns Over Lending, BISNOW, September 16, 2015 – Ratings agency tut-tuts over declining standards in a time marked by crazily high liquidity levels.







21. September 2015 by Wayne Grohl
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CCIM Institute Presents “Current Topics in Real Estate Tax” 90-Minute Webinar Sept. 25, 2015


Catch a critical webinar on real estate tax topics and snag a special rate from CCIM for REALTORS®! The seminar runs one week from tomorrow, on Sept 25 from 1-2:30PM CST. Don’t miss this key presentation on the latest tax issues!  Register today at the link below:

Current Topics in Real Estate Tax

The  Robert L Ward Center for Real Estate Studies presents Current Topics in Real Estate Tax. This 90-minute webinar to will provide information on trending real estate topics in U.S. tax structure and their potential impact in how real estate professionals do business. Hot topics include the outlook for expired tax provisions and 1031 Like-Kind exchanges. Evan Liddiard, Senior Policy Representative – Federal Taxation from the National Association of REALTORS® and former tax advisor to Senator Orrin G. Hatch, current chairman of the U. S. Senate Finance Committee, will be our facilitator. The session will be held on next Friday, September 25, 2015  from 1:00 – 2:30 pm (central time.)

The fee for non-members is $95.  CCIM Institute is happy to offer our REALTOR® partners a special rate of $30.00.

Register now – space is limited:

17. September 2015 by Wayne Grohl
Categories: CCIM | 1 comment

Commercial Real Estate News Roundup for Sept. 14, 2015

Drone testimony from NAR’s President, 50M new square feet of industrial comes online, and apartment tenants controlling thermostats and window shades with their smart phones — it’s all here in the Commercial Real Estate News Roundup for September 14, 2015.






14. September 2015 by Wayne Grohl
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The SBA Loan Market: Financing In Greater Demand Than Ever

Nationally speaking, the finance of owner-occupied commercial real estate seems to never get significantly easier. Our current national economic conditions of recovery have not yet heated up the average enthusiasm of bankers for financing sub-$2M expansions in most real estate sectors, which ensures a more or less permanent lending gap affecting small business that Congress has recognized and addressed with the creation of the Small Business Administration.

Dating back to the Herbert Hoover administration, what eventually became the SBA was established by Congress to help businesses hurt by the Great Depression of 1929-39.  Shepherded along by Franklin Roosevelt, the program evolved during World War II to assist smaller suppliers with loans in competing against huge corporations for manufacture of war materiel.  The SBA we know today was created in 1952 by Congress and signed into law the next year by Dwight Eisenhower, spinning it off from the US Department of Commerce into the standalone agency “under the general direction and supervision of the President”.

7(a) – The SBA’s Keystone Loan Program

SBA’s lending and programs are many, but the biggest and most used is called 7(a) Loan Guaranty, where loans up to $5M are available to business for a wide range of purposes including real estate financing.  Terms can reach as long as 25 years while most loan repayments are shorter than that.

Fixed-rate 504 loans

While SBA offerings under its 7(a) program are fairly well known, less widely known is the 504 Certified Development Company loan program. Offering long-term fixed-rate loans for purchases of real estate or equipment, 504 is lauded for lower costs because the fixed interest rates tend to be below-market.

Intermediaries called Certified Development Companies commonly secure 40% of such loans, with 10% coming from borrowers and the remaining 50% coming from a private lender under SBA guarantee. According to the most recently published SBA Quarterly Lending Bulletin, the aggregated number of small business loans outstanding reached almost $600 billion, reflecting a rise year-over-year of 1.7%.

Both commercial industrial (C&I) and commercial real estate (CRE) loans make up small business loans.1 A careful look at these loans shows that they continue to indicate progress in capital availability for small businesses. For example, C&I continues to maintain a positive uneven growth (Figure 2). In addition, the decline in the small business share of CRE loans has slowed. C&I loan standards changed little in the first quarter of 2015, but bankers reported easing standards and terms on loans secured by nonfarm nonresidential borrowing (Federal Reserve’s Board Senior Loan Officer Opinion Survey). While there was not a significant change in demand for C&I loans, respondents reported that the demand was stronger for all CRE loan size categories.

The reminder is that SBA financing is a heavily-used option for the commercial real estate deals that are in the reach of professionals in secondary and tertiary markets.  As the recovery struggles to spread itself evenly across all the scales of local market in the US, 7(a) and 504 programs are there to make that recovery felt in every corner of the economy.


10. September 2015 by Wayne Grohl
Categories: Finance | Tags: , , | Leave a comment

Commercial Real Estate News Roundup For Sept. 8, 2015

Big mergers, global buyers desire one-stop-shopping, industrial pricing may be at its peak, Wal-Mart shrinking, Apple’s fresh look, booming multi-family market — and more. It’s all here at the Commercial Real Estate National News Roundup for September 8, 2015.











  • High Walk Score Makes MF Stand Out,, September 4, 2015 – Value-added properties that offer high walkability and family fun are very desirable in suburban areas.
  •  The Latest on Rent Growth, Commercial Property Executive, September 1, 2015 – Multi-family rent growth holding strong, but volatile international stock market may trigger a cooling soon.
  • Steady Hiring Favors Multifamily,, August 31, 2015 – Consumer confidence and  a record number of 20 somethings in the market drive multifamily income opportunities.



08. September 2015 by Wayne Grohl
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Study: EB-5 Challenges, Successes

Since 1990, the EB-5 visa program has been a tool for converting international capital flows into local economic development and employment, creating jobs in targeted areas and offering foreign investors visas for doing so. Funds from foreign investors are often channeled into capital for commercial development projects and a cottage industry around the process has arisen in the years since it first came online.  Commercial brokers and developers across the country have participated in projects funded in part by EB-5 investors, and the interest level is on a steady rise.

Since the time when I published a large list of EB-5 Regional Centers, we’ve seen the program in the news, backing interesting and sometimes even exciting projects all over the U.S.

With Finance Sometimes Comes Allegations Of Fraud

Along with this spike in interest and EB-5 participation has come charges of fraud and abuse from the SEC, such as the recent case of two commercial property developments that allegedly weren’t, both in Seattle. Using private placement memos and subscriptions that, according to prosecutors, did not accurately reflect the project to investors,  has landed one developer in hot water.  While non-EB-5 proposals are just as susceptible to fraud as those under the program, other cases abound, and concerns about lack of transparency as to the program’s effectiveness have been raised.

Report Cites Successes, Challenges, Provides Perspective

A recent Report by the Brookings Institution cites EB-5’s increased utilization despite a “dearth of reliable and publicly available data [on] the economic impacts of regional center investments.

An hour spent with the Brookings report will very well serve the reader interested in understanding the broad shape of the EB-5 program.  It’s invaluable for parsing out the network of intermediaries in the program, understanding compliance requirements and learning the history of successful partnerships between regional centers, investors and the communities they serve.

04. September 2015 by Wayne Grohl
Categories: Finance | Tags: , , , | Leave a comment

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