One of the most popular questions I receive pertains to the difference between “triple net” and Gross lease rates. Most retail and industrial spaces are leased on a “triple net basis.” This basically means that the tenant is responsible for payment of real estate taxes and operating expenses. The Landlord essentially gets all of the rent proceeds. Triple net can essentially be broken down into 3 components: real estate taxes, operating expenses and utilities. The real estate tax bill associated with a property can be billed by the municipality directly to the tenant or the Landlord will bill the tenant as the property tax bills are issued on a quarterly basis. The former arrangement would be more common in a single tenancy building since the cost for taxes are not shared.
In a multi-tenant building, the real estate taxes are billed based on the proportionate share of the property that the tenant is leasing. Operating expenses relate to all of the costs associated with maintaining and operating a building. This includes items such as casualty insurance (the tenant will also need to carry a separate contents and liability policy), insurance, snow plowing, landscaping, management fees, maintenance and repair. In a multi-tenant building, these operating expenses are budgeted as common area maintenance expenses or “CAM.” The Landlord should provide a prospective tenant a detailed breakdown of CAM expenses so the tenant fully understands the costs and items involved in the CAM budget. The Landlord should also be able to provide a history of CAM expenses to provide some framework for how efficiently a building is being managed. The costs for utilities constitute the third net and are typically billed separately by the Landlord.
In a Gross lease, all or a portion of the expenses are included in the rent. Virtually all gross leases will include the current base year for the expenses at the inception of the lease with an adjustment in following years should the expenses increase during the lease term. So in the case of real estate taxes, fiscal year 2016 should be the base year used for a lease signed in 2015. Be careful to make sure your lease includes language covering the correct fiscal year which starts on July 1st. Calendar year 2015 operating expenses are used for leases written in 2015. After December 31, 2015 the operating expenses would be reconciled to determine the base year. It is typical that office space is leased on a Gross lease but net of electricity for lights and plugs. So the base rent includes base year real estate taxes, operating expenses and utilities for heat and air-conditioning but the tenant is billed separately or the space is metered separately for electricity usage.
It is common to negotiate specific details of which operating expenses are to be the tenant’s and landlord’s responsibilities. For example, many industrial triple net leases will require the landlord to be responsible for roof, floor and structural components of a building. The details relating to operating expenses in commercial leases can oftentimes be a complex topic. It is important that your real estate broker have a full understanding of this topic so that he or she can advise you correctly in lease negotiations to avoid hidden costs. Your attorney will provide guidance and advice as well. Please contact me to further discuss how we can provide professional advice and assistance relating to leasing commercial space. More on this topic in Part II.
Please contact me to discuss how my firm can be of assistance with your purchase of commercial property.
President, Boston Commercial Properties