For many businesses, entering into a lease is an essential and important part of their businesses. Often, lease payments are a business’s largest expense, next to payroll. However, given the complexity and sheer length of a typical commercial lease, it is a daunting proposition to review and negotiate a lease on your own. This is the first in a series of posts discussing the major issues of a typical commercial lease.
Rent is often never just one number in a commercial lease. It may, in fact, include a number of different charges, such as base rent, percentage rent and operating expenses, that can greatly increase what you originally thought would be your “rent” payment. Leases that charge operating expenses and/or real estate taxes to the tenants are sometimes referred to as “net” leases. Net, double net, triple net are terms often used to show what expenses, in addition to the base rent, the tenant will pay to the landlord under the lease. Let’s take a look at some of the most common forms of rent that are due under typical commercial leases.
A. Base Rent
Base Rent is what we usually think as “rent” for the premises. This is what you pay to use a space owned by the landlord. It is usually expressed as a fixed amount (based on a dollar figure per square foot of rented space). For example, if we assume a rate of $25.32/sq.ft. for a space of 4,430sq.ft., how would your monthly base rent be calculated? Multiply the base rental rate ($25.32) by the number of square feet you are leasing, then divide by twelve. In this example, the monthly base rent would be $9,347.30.
B. Percentage Rent
For some retail leases, you may see a provision for percentage rent. Percentage rent is usually triggered once your business’s annual or monthly revenue exceeds a certain threshold. The revenue that exceeds the threshold is multiplied by a preset multiple and paid to the landlord as rent in addition to the base rent. Percentage rent may be paid monthly or annually depending on the terms of your lease.
C. Operating Expenses
Operating expenses are charges such as utilities, service contracts, maintenance, repairs to common areas that the landlord incurs and then charges to its tenants. Tenants are usually liable for their proportionate share of operating expenses, meaning that if a tenant leases 1000 square feet of a 10000 square foot building, that tenant would be responsible for 10% of the total operating expenses of the building. Operating expenses are sometimes called common area maintenance, or CAM, charges.
D. Real Estate Taxes
Some leases also pass along the real estate taxes to the tenant. Typically these are apportioned in the same manner as operating expenses.
E. Additional Rent
The lease may also provide that you’ll be responsible for additional rent. These often include utilities, penalties for late payment of rent, fees for the landlord to remedy a breach of a tenant’s lease obligations, construction management fees, and any other fee or penalty as contemplated by the lease.
Another issue to keep in mind is that while you are paying rent based on the square footage shown on the lease, your actual usable space will be less. This is because landlords often factor in common areas, such as hallways, restrooms, stairwells and elevators when calculating your total leased space. Ask your landlord or real estate broker what the core factor of the building is to find out the exact square footage of your usable space.
In our next post, we’ll learn about what you can do in a leased space, or the “use” clause of a commercial lease.
Commercial leases are often lengthy and difficult to understand. Even straightforward issues (or what we expect to be straightforward issues), such as rent, can become complicated. Understanding your rental obligations, which can range from a simple base rent payment or a sum of a variety of rental payments as we discussed, under a commercial lease is crucial, since rent payments usually represent a large portion of a business’s expenses. We highly recommend that you work with a competent attorney to fully understand your obligations, including rental obligations, under a commercial lease.
General Counsel, P.C. – Every Business Needs a General Counsel: Led by Norman Eule, General Counsel’s Business and Tax Practice Group has over 40 years of professional experience in counseling business owners on all aspects of commercial transactions. Our attorneys have extensive experience representing a wide range of local, regional, and national companies and business ventures. If you have any questions regarding the effect of the new solicitation rules on your company, or any other business law related questions, please contact either Norman L. Eule or Robert Lee.