Question 1

What are the different types of commercial leases in Texas? What are the differences between triple net (NNN), gross, and modified gross leases?

Accepted Answer

The most common types of commercial lease agreements can be grouped into (1) Triple Net (NNN), (2) Gross, and (3) Modified Gross. 
For businesses acquiring a retail space, Triple Net is the most common lease structure. Under a Triple Net lease, the tenant is responsible for paying a base rent in addition to paying its proportionate share of property taxes, insurance, and common area maintenance charges. The tenant is also typically responsible for most repairs and replacements to the premises, except repairs to the roof, structure, and foundation. However, the exact delegation of responsibilities can vary by lease agreement. 
Gross leases are more common for office spaces. Under a Gross lease, the tenant pays a base rent, often at a higher rate than a triple net lease but is generally not obligated to pay for property taxes (other than taxes on the tenant’s property), insurance, and common area maintenance charges. 
A Modified Gross lease is a combination of the two structures in which the tenant pays some portion of the property taxes, insurance, and common area maintenance charges or the tenant may be obligated to pay any increases in these expenses over the amounts incurred in the first year of the lease.

Question 2

I am a franchisee. What is different about negotiating a lease for a franchised business?

Accepted Answer

Under a franchise agreement, franchisees are required to comply with the franchisor’s standards for operating and developing the business. The franchise agreement and standards often include terms that affect the franchisee’s leased premises and terms of the lease agreement. A franchise agreement may require that you include a lease rider or specific lease terms required by the franchisor. This is often in the form of an amendment to the lease agreement which is attached to the franchise agreement as an attachment or exhibit. 
Franchise agreements will often include restrictions on relocation and a requirement to maintain the right to operate at the premises during the full term of the franchise agreement, which can impact the agreed upon term of the lease agreement to ensure consistency across the agreements. The franchisor may also require the franchisee to construct the premises in accordance with the franchisor’s requirements and may even require you to use the franchisor’s designated or approved contractors.
The lease agreement, on the other hand, may require the landlord’s consent to all leasehold improvements and contractors. Other terms in the franchise agreement, such as the requirement to remodel, ability of the franchisor to modify the goods and services, and the requirement to use the franchisor’s signage, may also contradict with the terms of the lease agreement and require negotiation. 
It is important to consult with an attorney to ensure you maintain the best available balance between the two agreements.

Question 3

What is the process for purchasing or selling commercial real estate?

Accepted Answer

The first step in a commercial real estate purchase or sell is identifying the property to be acquired or marketing the property for sale, depending on whether you are the purchaser or seller. Once a property or buyer is identified, the parties typically negotiate the most significant terms of the agreement, such as the price, duration of the inspection or due diligence period, earnest money deposit, the closing date, any conditions to closing (i.e. circumstances under which a party may terminate the agreement and elect not to continue with the purchase or sale), and allocation of expenses between the parties. These terms are memorized in a Letter of Intent (LOI) and signed by the parties. 
Next, a Purchase and Sale Agreement is drafted and negotiated by the parties. This process often includes a few (or several) rounds of revisions and negotiations until the parties reached a mutually acceptable agreement. Upon signing the agreement, the parties deliver the agreement to the agreed-upon title company, and the buyer pays the earnest money deposit to the title company to hold in escrow according to the terms of the agreement. 
During the initial stages after signing the agreement, the seller is often required to provide the buyer with certain documents relating to the property and the buyer conducts its due diligence, which may include conducting inspections or feasibility studies. During this time, the title company also provides a draft of its title policy commitment, which includes exclusions to the title policies and copies of documents that affect the property (such as easements, restrictive covenants, and development agreements). The buyer evaluates these documents and submits any objections to the commitment or title to the seller and title company. Both the title company and seller respond to the objections stating whether they will agree to take the actions requested by the buyer.
After expiration of the due diligence period, the parties prepare for closing. This may include finalizing the underwriting process for any financing the buyer will obtain. Prior to closing, the parties will finalize the drafts of any closing documents, which often includes a General or Special Warranty Deed, each party’s resolutions approving the transaction and identifying the individual who is permitted to sign on behalf of the party (if the party is a business entity), and a settlement statement identifying the various cost being paid through closing.
Typically, the title company facilitates the execution of the closing documents and files the Deed with the appropriate county property records.

Commercial Real Estate FAQs

What are the different types of commercial leases in Texas? What are the differences between triple net (NNN), gross, and modified gross leases?

I am a franchisee. What is different about negotiating a lease for a franchised business?

What is the process for purchasing or selling commercial real estate?

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