So last week we discussed in some detail lease negotiations; this week I was going to address Lease Costs and Lease Documents but Lease Costs turned out to be a more complex topic than I had estimated so let's talk about lease costs you are likely to encounter in a lease negotiation so that you can more confidently negotiate your lease and next week we will discuss;
Small Leases: Part IV - Lease Documents
This is actually a relatively simple topic but in practice it becomes complicated mainly due to improper usage of some of the terminology used in leases. Let’s discuss those terms, what their textbook meanings are, and how they are used in practice.
The textbook definition of rent is the amount you pay to occupy the space. All other costs are above this amount so utilities, taxes, maintenance, insurance and any other cost is in addition to rent. This is more appropriately called Net Rent. If all the taxes, insurance and maintenance were included in your rent that would be called Gross Rent.
Additional Rent/Operating Costs/Common Area Maintenance (CAM)
Depending on the scenario, according to textbook, the property taxes, property insurance, and property maintenance are either called Additional Rent (usually retail setting), Operating Costs (industrial) or CAM charges (office).
This generally refers to utilities specific to your occupied space. Utilities for the common areas of the building are usually covered in Additional Rent. Depending upon whether or not the building has separate meters for each space your utilities will either be your own responsibility (separately metered) or included somehow in Additional Rent. If they are included in Additional Rent, have your accountant or lawyer check the formula.
In common usage these terms get intermingled quite a bit. Net Rent is usually used correctly but sometimes Net Rent may include some of the Additional Rent or even some of the utilities. Gross Rent is most often misused and often only includes some of the items of Additional Rent as well as some or even all of the utilities. The key takeaway is to make sure what is or is not included in “Rent” is clearly specified.
If Rent is being misused you can be sure that the term Additional Rent (Operating Costs, CAM costs) is also being misused. The bottom line is the same in any scenario; forget what terminology is being used and just ensure the lease spells out what items are or are not included in “Rent” or “Additional Rent”. Generally the larger the landlord, the more likely the terms are being correctly used, but this is not written in stone.
In retail, and especially in shopping centre settings, Additional Rent can mean a few things. In major shopping centres, landlords will often charge a Percentage Rent. This is basically a charge based on a percentage of your sales, so the more you sell the more rent you pay. At first this seems unfair (and sometimes is for small tenants in large malls) it is an incentive for the landlord to make their shopping centre more attractive to shoppers. The more attractive their centre is, the more money you make. I guess it’s a win-win…of course the landlord probably wins a bit more than you do.
In any setting (industrial/office/retail) with multiple tenants in one building or complex there can often be Gross Up charges. How this usually appears is if you are renting a space of, say, 2400 sf, you pay rent on 2425 or something like that. Why? What this is, is a way of making sure each tenant pays for their share of the common spaces of the building like a foyer, hallways, washrooms, elevators, etc., etc. This is common and if done properly is perfectly legitimate.
Okay, with those two comments out of the way, additional rent is, as mentioned before, the Property Taxes, Property Insurance and Property Maintenance. Some first time tenants wonder why they have to pay these costs if they don't own the building. The short answer is one way or another tenants pay for everything. Is this unfair? No. Investors (landlords) invewst their money to make a return. If they don't make a certain return, they don't invest.
If you are in a multi-tenant building, additinal rent must somehow be apportioned properly between tenants. This is normally done on a square foot basis. In otherwords if your space is 12% of the entire leasable space you pay 12% of the total additional rent. In larger shopping centres with "anchor" tenants (large well-known retail firms that attract a lot of shoppers) will sometimes pay less than their share or none at all, and you can guess who picks up the slack. While this may not be fair, there are only two things we can really say about that. First, nobody ever said it would be fair and secondly, the argument made is that the anchor brings in all these people that end up buying some of your products. The bottom line is that this is normal in retail shopping centre leases.
Many multi-family properties do not have separate meters for utilities and in these cases, utilities are often included in additional rent. In these cases, you want to pay particular attention to how those utilities are calculated. What if your neighbor is a type of business that uses a lot of water? How is water apportioned?
This is a fairly simple topic. In common practice, utilities are pretty much the same as textbook. The tenant pays all their own utilities and their neighbor pays for all hers or his. This does get a bit tricky in situations as mentioned above where there is no separate metering of utilities. If there is separate metering you can easily determine your utility usage. If there isn't, the lease will specify how utilities are to be apportioned.
A Final Note on Lease Costs
If there is one precept to burn into your memory for lease negotiations, remember that there is very little legislation governing commercial leases. In otherwords, whatever that lease says, goes! Whatever you agree to will likely be upheld in court. Residential leases have The Residential Tenancies Act (Alberta - similar ones in other
provinces) but there is nothing for commercial leases.
If you are a landlord, definitely visit your lawyer and get a "Standard Lease". Read it through carefully and be sure you understand each clause because some of them are rather complicated and written in legalese. You can be sure sophisticated tenants will want to negotiate some of the clauses and you need to be sure you understand what you are negotiating away.
If you are a tentant, don't be intimidated by a landlord's "Standard Lease". Every lease is negotiable (although check my last post in this series for just how much some leases are or are not negotiable). So beware.
Most landlords are very fair people but you can be sure the leases will be written in the landlords favour, wouldn't you? Read them and have your lawyer read them first.
See you next week for...
Small Leases: Part IV - Lease Documents