Rent is typically one of the largest expenses in any business operating budget, and, therefore, it is important to have a clear understanding of what your organization is paying for each month. Whether you are leasing a full floor of Class A office, a large warehouse in the suburbs, or a small retail shop, you are also paying for the upkeep of the property where your space is located. These costs have a number of names in commercial real estate – additional rent, operating expenses, CAM charges – and landlords pass these expenses through to their tenants.
Additional Rent and Triple Net Leases
If you have a triple net lease, it probably includes a section called Additional Rent. This section specifies a dollar amount per square foot per year that you are responsible for paying in addition to the main rent. This additional rent covers any and all expenses the landlord may incur operating the property, including the following:
- Municipal real estate taxes
- Commercial property insurance
- Janitorial, cleaning, and landscaping services
- Any general maintenance and repairs
- Building systems service contracts (HVAC, elevators, etc.)
- Garbage pickup service
- Security systems and services
- Third-party management fees
- Managers and maintenance employees pay
- Common area utilities
- Cleaning supplies, tools, and maintenance equipment
Keep in mind that this list is not exclusive, and depending on the verbiage in your lease, you may be responsible for a number of other operating costs, including capital expenditures. It is important to mention, however, that when you signed your triple net lease, the additional rent rate you were quoted was just an estimate for the year’s operating expenses. Landlords reconcile the actual expenses at the end of the year, and depending on the outcome, send out additional bills or issue credit for the next year.
Operating Expenses and Gross Leases
While full service (or gross) leases already include the cost of operating the property in the full service lease rate, they are also subject to a year-end reconciliation. If the actual costs exceeded the operating expense stop specified in the lease, the tenants will be billed for the overages. For example, if the agreed upon expense stop was $10 per square foot and the actual expenses ended up being $11.25, the tenants will receive a bill for the overage of $1.25 times the square footage of their space.
Sales Tax on Rent
This may be obvious to some, but we also wanted to mention that commercial rent and operating expense costs are subject to sales tax as they are considered a “sale” in the eye of the tax law. Even if the tenant makes direct mortgage, ad valorem taxes, or insurance payments on behalf of the landlord, a sales tax will be assessed as such payments are ultimately considered rent. Depending on your locale, you may need to budget up to an additional 10% or more, to cover the sales tax associated with your lease.
Utilities and Other Space-Specific Expenses
In addition to paying your prorate share of common area utilities and expenses, you will also be solely responsible for the utilities in your space, including electricity, water and sewer, cable and internet. Unlike the CAM charges, which will be assessed and billed by the landlord, you will be paying for these services directly to the utility service providers.
If you are signing a new lease, you will most likely need to reconfigure or remodel the space you are leasing. While landlords often provide a tenant build-out allowance as an incentive for new tenants, any expenses associated with readying the space for occupancy that exceed that allowance, will also be your responsibility.
Factoring in all of the above will give you a more complete picture of your corporate real estate expenses. If you need further guidance, you should consider reaching out to one of our tenant rep specialists. They can help you understand your real estate costs and optimize your real estate portfolio to maximize your returns.