Friday, October 11th, 2019 October11th2019

Sell for More Trivia: What is a Clear Lease?

Published on October 11th, 2019

Sell for More Trivia is a weekly blog series that playfully presents a trivia question about commercial real estate.

 

Prologis made a big splash in the industrial market two years ago when it debuted a new lease structure…called a Clear Lease.

The Clear Lease represents a significant shift away from traditional lease forms in that it offers tenants:

  • A simplified, shorter document
  • Fixed costs related to operating expenses, capital expenses and HVAC equipment costs over the term of the lease.

Keep in mind, Prologis is one of the largest landlords in the industrial market with a portfolio of 786,000,000 SF globally.  When they make a move like this – it matters.

One of the first things tenants notice is that the Clear Lease is shorter than most standard industrial leases.  It’s just 11 pages.  And it’s written in a way that is more straightforward and easier to digest than a typical lease.  Much like its name suggests, the structure aims to create more transparency for tenants.

For tenants, the biggest selling point is that it eliminates a spike in costs or a surprise bill after a year-end accounting reconciliation.  In a typical triple net lease, landlords charge a base rent, operating costs and taxes that pass through directly to tenants.  Even with the best budgeting tactics, operating costs can spike due to unforeseen events, such as a record snowfall.  The Clear Lease fixes those operating expenses with one set number.

In addition, some standard leases require tenants to reimburse the landlord for capital expenditures.  The reimbursement is based on the project cost and is amortized over the useful life of that capital expense, such as a roof replacement or resurfacing a parking lot.  The Clear Lease fixes the capital expenses at a set dollar amount.  The cost of HVAC equipment repairs, maintenance and replacement is also fixed.

The Clear Lease does not fix expenses in a triple net lease that a tenant pays directly such as utility costs, property taxes or any damage the tenant causes to a property beyond the usual wear and tear.

A potential downside to the Clear Lease is that it may create some challenges for the sale of assets.  A potential new buyer may not have the same perspective as Prologis and discount the value of the building because of it.

I’ve yet to see any competitor come out and say they’re going to guarantee the operating expenses quite like Prologis has.  Tenants will pay for convenience and that’s what’s happening here.  Let’s see if other large landlords follow their lead.

 


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About Beau Beach, CCIM

Beau is a tenacious Commercial Real Estate Broker, author and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.

Beau leads Beachwood which is a commercial real estate broker for sellers in the Nashville, Milwaukee, South Florida and Chicago markets.

He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.

Beau can be reached at 800-721-3287, click to schedule a call or Beau@BeachwoodSells.com