Understanding Additional Rent
Lease TypesFirst, let’s break down commercial real estate leases. There are three broad types, Net leases, Gross leases, and Semi Gross leases.
Net leases are leases where the quoted or advertised rate for the space is Net Rent (sometimes called Base Rent). There will be Additional Rent payable by the Tenant to cover the occupancy costs. These are the most common commercial leases. They can come in many flavours however ie. Triple net (net, net, net). Or Net, Net. What matters is that you verify what is and what is not included in the Additional Rent such as the Roof and Structural repairs.
Gross leases usually are one rate per square foot or simply a monthly rate that is charged for the lease of the space. It may or may not cover all or some utilities. You need to verify extra charges.
Semi gross leases will include less items than a Gross lease but more than a Net lease. Once again you have to verify what is and is not included in the quoted rent.
Industrial/commercial/office units are mostly rented on an annual net basis to the Landlord. There are two common terms used for this Net Rent or Base Rent. This is the rate per square foot that is usually quoted on a listing or advertisement for commercial real estate space.
Additional RentThese are charges for costs of occupancy of the tenancy that the Landlord passes on. They are usually budgeted annually ahead the fiscal year and charged out to the tenant on an annual per square foot basis, payable monthly. At the end of the Landlord’s fiscal year an accounting is done on the actual expenses and either the Landlord or the Tenant has to cut the other a check to bring the actual charges in line with what was paid.
Additional rent comes in many for flavours.
CAM (Common Area Maintenance)As the name implies these are charges for maintenance of the common areas such as stairways, elevators, escalators, hallways public washrooms. This type of Additional Rent is most often encountered in an enclosed mall but can be found in other types of commercial real estate as well.
Percentage RentThis type of Additional Rent is a percentage of gross sales transferable as Additional Rent to the landlord. It is most often seen in enclosed malls and some types Plaza’s. While some tenants find this concept of percentage rent unattractive, it does serve as an incentive to the landlord to keep doing his part to drive traffic to the mall and make the shopping experience pleasant and the mall a destination. As a note to those with professional occupations, even when locating in a mall you are usually not required to pay percentage rent.
Food Court ChargesTenants in a food court can expect these charges over and above CAM and TMI. These charges are for the cleaning and maintenance of the tables, and area specific to the food court. Cleaning and security for these areas generates a lot of expense for landlord.
TMI (Taxes Maintenance Insurance)This is the most common type of additional rent that you will encounter as a commercial real estate tenant. It is payable over and above the Net Rent. This Additional Rent represents the costs of occupancy of the property, the realty taxes, the maintenance of the property including repairs, snow plowing, landscaping etc., as well as the costs to the Landlord of insuring the property. It may or may not include structural repairs and the roof of the building. Each lease is unique, each Landlord is unique and you should ensure that you know what is and is not covered by this type of additional rent.
What type of lease do YOU want?When considering the lease types clients often express a preference for either the gross or net type of lease. Sometimes this preference is not founded on experience or the clearest practical thinking.
There’s an old saying that nothing is free, and nowhere is that more true than in commercial real estate. The simple fact is that having a tenant in a commercial building generates expense for the landlord that he needs to recover.
Here is what I see is the essential difference that really matters to a tenant when considering whether to have a Net or a Gross lease.
In the Gross lease, you as a tenant will never know what the amount of the landlord’s expenses actually are or what items he considers to be expense and has added in.
In a net lease you get to see the actual expense. In your offer to lease and the resulting lease you should specify that you get an annual accounting of the additional rent. If there appear to be unreasonable items, then query the Landlord about them!
I sincerely hope that this article has been of some assistance to you. The process of leasing commercial real estate purchase is complex. There’ve been whole books written on the subject of Additional Rent, CAM, and TMI. This article is simply meant to give you an introduction to the concept so that you can make informed leasing choices.
But, armed with advance understanding of the process and with the assistance of a competent commercial real estate broker, a competent accountant, and a competent commercial real estate lawyer - the path can be reasonably smooth.
In the event that I can assist you with the purchase, sale, or lease of your commercial real estate, please either fill out a contact form on www.TimReed.ca or contact me via the phone numbers on the website. I would be most pleased to speak with you!
Real Estate Broker
ICI director/ Iprorealty Ltd.
Member Canadian Commercial Council
© Copyright, January 9, 2020, Tim Reed, not to be reproduced without written permission