Most real property leases are written with non-legal terms that read like Greek to the non-landlord. In fact, Microsoft Word often underlines them as misspellings or grammatically incorrect. This article will give you the tools to understand basic lease terms and beat the landlord at his/her own game. It is also essential to compare proposals from different buildings. Consider the following:
The premises have 10,000 rentable square feet. Rentable measurement is determined by BOMA Standards, 1996.
The load factor is 15%.
The rent shall be $20 per sf NNN.
Tenant improvement allowance is $20 per usable square foot.
Services supplied will be comparable to other class A office buildings in the area. Renewal shall be at 95% of market rate of other class A office buildings in the area.
Annual increases shall be 3% of the base rent or CPI increase, whichever is greater.
Operating expenses and real estate tax increases over the base year will be passed through prorata.
Rent shall begin on the commencement date, not the possession date.
These terms were never covered in law school or the bar exam, but they were created by landlords to make you feel illiterate in your own country!
RENTABLE - You have 8,800 sf within your walls as determined by BOMA (Defined Below). The landlord adds 15% to charge you a part of the common areas-hallways, bathrooms, lobbies, telephone rooms etc.
LOAD FACTOR - This is the common area factor added to usable square feet to yield rentable square feet. We started seeing this term in the 1980's as a way to subtly increase rental income to the landlord. It is also known as the landlord's "finger on the scale".
BOMA MEASUREMENT - Building Owners and Managers Association has created definitions of measurement. Demising walls are measured to the middle of the wall. Corridor walls are measured to the inside wall of the premises. Exterior walls are measured to the predominate feature. Predominate feature means that the window or the wall is more or less than 50% of the total surface.
Here is where BOMA gets risqué - "No vertical penetrations are included"! This means the area of elevator shafts, stairwells, and HVAC stacks are excluded from measurement.
If you are starting to think you need an architect to verify the landlord's measurement, you are correct. Measurement mistakes, unintentional and intentional, are common and usually in the landlord's favor! Several of our clients have saved over 10% when we suggested measuring their space.
NNN - Triple net charges are added to base rent for operating expenses and real estate taxes. Charges include your pro rata share of utilities, insurance, management, repairs and maintenance, janitorial service, waste removal, security, lawn care. This should not include capital improvements such as a new roof or new parking lot. Triple net is an ala carte menu whereas gross is a complete dinner (see below).
GROSS RENT - Opposite of Triple net (NNN) rent. It includes base rent, operating expenses, real estate taxes, etc. (see above).
USABLE - "Usable square feet" is the space within your walls that you occupy and use exclusively.
ANNUAL ESCALATION - In today's soft market, this is not a given. There is no statute that ordains an annual increase in a lease. Fairness usually means that the landlord be compensated for increases in operating expenses and taxes which currently approximate $10/sf in a class A office building. An inflationary increase or pro rata increase over the base year are fair. Beware of fixed or inflationary increases that are based on the base rent which not only compensates the landlord for inflation but increases his/her profit because mortgages are usually fixed.
CPI is consumer price index increase as defined by the Federal Government. It is used less often because of difficulty of determination.
SUITE ELECTRIC - This is not a typo or opposite of "bitter electric". Landlords charge for electricity used within your suite for lights and wall outlets. Often these are separately metered. Guess who pays for the meter? Electric for air conditioning is not included unless a heat pump system is used. Beware!
CLASS A OFFICE BUILDINGS - There is no common accepted definition for this term. It will differ based on city or suburb, region of the country and if you are talking to an owner, user, landlord, assessor, buyer or lender. It is one of the most abused terms in real estate.
SUBURBAN - full service building with sit-down restaurant(s), health club/locker room, fiber optics to the building, some covered parking, bank, on site manager, on site engineer, janitorial personnel and security guards during the day. Its rent will be in the upper 10% of the market. Free parking on site may vary by area. A travel agency used to be included pre-internet. Tenants include large corporate law firms, Fortune 1000 companies and real estate developers.
URBAN - Buildings with rent in the upper 10% of the market. Starbucks Café, on site manager, on site engineer, janitorial personnel and security guards during the day, age is less than 35 years old.
CLASS B - A building with fewer amenities than class A. The majority of buildings are class B.
CLASS C - Suburban building containing one and a half story building that has no amenities and is not meant to impress clients. An urban building pre World War II with transoms, inadequate HVAC and has low rent in the bottom 25% of the market
BASE YEAR - The parties agree to the calendar year which operating expense and property taxes shall be used to compare increases or decreases to. It is often the year you move but it is negotiable and should be the second year of occupancy because the landlord has already factored current cost increases into your base rent. Beware of new buildings that have not been fully assessed. Lease language should include full assessment after substantial occupancy or you may pay substantial dollars for property tax increase. Real estate taxes usually increase substantially if the property is sold, so negotiate fixed annual increases.
OPERATING EXPENSES - Defined by the lease, it generally includes utility charges, property and casualty insurance, repairs and maintenance expense, janitorial service, waste removal, management fees, common area maintenance, security, window washing etc. It should not include legal expenses to collect delinquent rent or to sell or refinance the building. It should not include real estate broker fees or tenant improvement work.
TI (TENANT IMPROVEMEMT) ALLOWANCE - Landlord builds into your rent money that he will spend on your behalf to construct or demolish walls, replace or clean carpet, move or upgrade lights, replace ceiling tiles etc in your suite. Beware if the improvements are based on usable not rentable square feet. Also, is the landlord supplying HVAC equipment or is it coming out of your allowance?
If your improvement costs exceed the allowance, the landlord may amortize the cost over the lease term with interest so the tenant does not have upfront costs.
FREE RENT - There is a free lunch if the landlord does not increase the rent to recapture the free rent! In a soft market, landlords will abate rent to entice tenants. Landlords want to keep base rent high on the face of the lease to maximize financing and value for sales purposes. This is a good thing for a tenant to have but it is not tax deductible; you can't have everything, but always ask!
REAL ESTATE BROKER - Licensed person who procures you for the landlord, represents the landlord, and is compensated by the landlord unless the parties otherwise agree. He/she has a duty under agency law and state real estate broker law is to convey your negotiating strategy to the landlord. Caveat Emptor!
TENANT REPRESENTATIVE - Your licensed real estate broker agent who may be paid by the landlord if all parties are informed and agree that he is your agent. Also known as a corporate real estate advocate, a tenant representative does not tell the landlord your negotiating strategy, but negotiates zealously for you.
We have attempted to level or tilt the playing field for the tenant.
Nothing contained herein is to be considered legal advice. Always seek legal advice when evaluating any legal document.
