News Oct 03 23

Factory for Rent Seeking: Essential Terms You Must Know for a Better Deal

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When seeking a suitable factory for rent, it’s crucial to be well-versed in key industry terms. These terms can empower tenants with the knowledge needed to make informed decisions.

Whether you’re new to industrial for rent real estate or a seasoned professional, understanding these terms is essential to securing the perfect factory for rent that aligns with your business needs and goals.

It's a must to understand all industrial terms before making a deal.
It’s a must to understand all industrial terms before making a deal. Photo from Unsplash.

Must-know terms when searching for a factory for rent

1. Tenant

A tenant is a person or entity that leases a space that belongs to a landowner for living or working. The tenant will possess the real estate for the limited time stated in the agreement.

Theoretically, a tenant is not the owner of the real estate. To be able to use the space legally, tenants must pay rent to the person who has the right of ownership over the real estate, called the landlord.

In other words, tenant is the synonym for a renter or a lessee.

2. Landlord

Contrary to the tenant, the landlord is the one who owns real estate and has the right to earn income from letting others use their property for living or working.

The landlord’s responsibilities vary case by case, depending on the capacity of the tenant and the value of the contract. There are cases where the landlord is the one who is paying for repairs, maintenance, and utilities; in other cases, the responsibility belongs to the tenant.

3. Triple Net Lease (NNN Lease)

A triple net lease, also called an NNN lease, is a lease agreement whereby the tenants, besides the fixed rental fee, have to pay for all expenses related to the factory for rent.

For example, tenants may need to pay for real estate taxes, property insurance, maintenance fees, and utility bills after paying for the rent themselves.

4. Gross Lease

The opposite term for triple net lease (NNN lease) is gross lease. In this lease agreement, landlord has to be in charge of paying all the costs related to the property like utility bills, janitor fees, etc. The tenant will pay the rent only.

Between a triple net lease and a gross lease, there is none that is more cost-saving. Usually, if the tenant doesn’t have to pay operation fees themselves, then their rent rate is higher than those who pay the operating fee themselves. At the end, it is only the difference between who will have to pay.

5. Common Area Maintenance Fees (CAM)

Common area in the industrial park.
Common area in the industrial park. Illustration from CORE5.

What are Common Area Maintenance Fees? It is an additional charge to the tenant on top of the fixed rent. As its name suggests, this fee is used to maintain the common area and utilities, which are shared by multiple tenants.

For instance, Common Area Maintenance Fees in an industrial park mean the landscaping fee, parking lot cleaning fee, etc.

6. Capitalisation Rate (CAP Rate)

The notion of Capitalisation Rate, or CAP Rate, is similar to ROIs (return-on-investment), but in the real estate scenario. That means the CAP rate is the statistic used to elevate the unlevered potential return on investment of a factory for rent after a period of use.

Let’s make a quick example. If tenants paid $100 million to use real estate and gained $20 million, then the CAP rate is 20 percent.

7. Available Space

Many new investors misunderstand that the total space of the industrial space is the same as the space available for use. In fact, they are different.

First, due to some construction purposes, the amount of space available in one industrial for rent may be reduced. Second, there may be spaces that are used in the meantime but will be vacant and ready to be used in the short term in the future.

Adding to this fact, the available space for lease may be different than the total space of the property at the moment. “Available space” is the term used in industrial real estate to refer to the space in a industrial for rent that is ready to lease at the time of a tenant’s demand.

The tenant should carefully discuss the available space for rent with the landlord before confirming the factory for rent deal.
The tenant should carefully discuss the available space for rent with the landlord before confirming the deal. Photo by Flickr.

Hence, when searching for a factory for lease, tenants must check the available space carefully with the landlord to avoid any unexpected misunderstandings.

Industrial for rent real estate common terms: The bottom line

We have gone through the top six common terms in industrial real estate. However, our discovery will not end here. Follow our social platforms (Facebook, LinkedIn) and subscribe to our newsletter, and stay tuned for the next article to learn more about the popular industrial terms in the factory for rent market.

>>> Part 2: Industrial for Rent Searching: Must-know Terms to Get the Best Deal

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