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Rental Rate Structures

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Rental Rate Structure

The structure of your lease depends on a few factors. It’s important to understand how your lease is structured and what the basic terminology means when negotiating your agreement. The type of property you are leasing plays a big part in determining the type of lease offered. An industrial property lease will be structured differently than one for a retail property or office space.

There are common (even expected) lease structures used within these sectors and the details can change from deal to deal. The type of lease you enter into will determine your share of property costs above and beyond your basic rent. Each lease is unique and it’s important to be sure you fully understand the basic structure and the details that will affect your bottom line.

 

Gross & Modified Gross

A Gross lease is less common today than a Modified Gross lease. In a gross lease all operating
expenses are inclusive of the tenant’s base rent amount and paid in full by the Landlord. In the modified version a stipulation is included to protect the Landlord against any major or unexpected expenses incurred by taxes, insurance, and property maintenance. In a modified gross lease, the tenant pays base rent plus an agreed amount toward these expenses after the first year. Typically the agreed amount is in the form of a percentage of the property’s total costs. The percentage is equal to the percentage of the square footage in which the tenant operates. Fifty percent of the building pays fifty percent of the costs.

 

Net, Double Net, & Triple Net (NNN)

In Net leases, the tenant agrees to pay specific outlined types of operating expenses related to the property. “Net” is a generic term that could mean all the property operating costs are negotiated into the lease, or a portion thereof. Double Net means that two of the main operating expenses will be the responsibility of the tenant. Generally speaking, those are taxes and insurance. And, as you might expect, Triple Net leases add a third expense into the mix, usually the building maintenance.

There are various differences within these fundamental lease structures that are associated with specific types of businesses. For example, a retail property lease may offer reduced rent or costs in exchange for a percentage of sales paid to the Landlord. Everything is negotiable, as they say. It’s to your benefit to discuss options with your Agent or Broker. Learn as much as you can about common expectations of lease terms used within your industry and location. Ensure your Agent or Broker negotiates all of the details into the lease. Don’t assume anything. Ask questions. This is where their expertise will benefit you the most.

 

Any questions? Contact Ryan at  [email protected] or  (713) 840-8528.

Ryan J. Hartsell, SIOR, MRE, Principal, and Managing Partner of Oxford Partners LLC, focuses on reducing the cost and risk associated with leasing and purchasing office and industrial property. He is recognized by his clients for his attentiveness, market knowledge, and negotiation prowess. He holds a master’s degree in commercial real estate and a bachelor’s degree in finance. As a third generation Houstonian and Principal of Oxford Partners, he has a unique appreciation for the business owners’ challenges by way of his own personal experience, which translates into better representation and empathy for his clients.  

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Commencement Dates

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Commencement Dates

The Commencement Date language in your commercial lease agreement is a particularly important detail not to be overlooked. As a tenant, you need to protect yourself against any unplanned delays in taking possession. If a new lease commences prior to moving in, you could be setting yourself up for a lot of additional costs and even potential legal issues with your current landlord.

To protect yourself from unexpected costs and logistic issues regarding lease commencement, your lease should state that “The Commencement Date will be the later of the 1st of the given month or the first of the month following delivery of the Premises by the Landlord”. You should also include “with substantial completion of construction” and request a CoC (Certificate of Occupancy). A CoC is a government issued document that confirms the building
construction is compliant with codes and the space is suitable for occupancy.

You can protect yourself further by including in the lease terms that the Landlord will pay a specific amount of money to the tenant for each determined period of time in which occupancy is delayed. That amount should equal the new rent costs plus any holdover penalty and any damages charged by the existing landlord if the tenant is liable for such costs. It is also wise to include a provision for terminating the contract without penalty if the lease has not
commenced by a certain date.

Any questions? Contact Ryan at  [email protected] or  (713) 840-8528.

Ryan J. Hartsell , SIOR, MRE, Principal, and Managing Partner of Oxford Partners LLC, focuses on reducing the cost and risk associated with leasing and purchasing office and industrial property. He is recognized by his clients for his attentiveness, market knowledge, and negotiation prowess. He holds a master’s degree in commercial real estate and a bachelor’s degree in finance. As a third generation Houstonian and Principal of Oxford Partners, he has a unique appreciation for the business owners’ challenges by way of his own personal experience, which translates into better representation and empathy for his clients.  

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Advantages of Negotiating an Assignment Clause in Your Lease

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The Major Difference Between a Sublease and Assignment Provision

An assignment clause in your commercial lease can protect your company from obligation to a landlord if, for example, you need to vacate prior to your lease end or your company changes hands. With an assignment of your leased space, the terms of the original lease are carried over to a new tenant. This differs from a sub-lease situation wherein you remain affiliated with the space once the sub-lessee takes over.

An assignment clause is not always an easy sell when negotiating terms with a landlord, however. It is in the landlord’s best interest to maintain enforceable control over his or her building as much as possible. An assignment clause poses risk to the building owner. He or she may add stringent restrictions for assignee approval or not allow an assignment clause at all.

If an assignment is permitted, it is likely that there will be extended due diligence periods in place. These provide the landlord time to examine the assignee’s financials and determine whether he or she comfortable with the potential new tenant.

It is wise to anticipate any future changes that may reflect the need for an assignment. Negotiations for an assignment clause may be more acceptable if specific scenarios are laid out for the landlord rather than a general clause “just in case”. This is known as a ‘carve-out”. Essentially, a ‘carve-out” defines potential future circumstances under which specific provisions are negotiated into the lease.

When negotiating a new lease, it will serve you well to account for anticipated changes in your company’s future. Planning and well thought out negotiations now could save you serious repercussions down the road.

 

Any questions? Contact Ryan at  [email protected] or  (713) 840-8528.

Ryan J. Hartsell , SIOR, MRE, Principal, and Managing Partner of Oxford Partners LLC, focuses on reducing the cost and risk associated with leasing and purchasing office and industrial property. He is recognized by his clients for his attentiveness, market knowledge, and negotiation prowess. He holds a master’s degree in commercial real estate and a bachelor’s degree in finance. As a third generation Houstonian and Principal of Oxford Partners, he has a unique appreciation for the business owners’ challenges by way of his own personal experience, which translates into better representation and empathy for his clients.  

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6 Reasons to Audit Your Building’s Operating Expenses

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Prevent Overpayment of Your Company’s Leasehold Expenses

Real estate and leasehold expenses are among the most impactful upon your company’s bottom line. It is an essential element of any company’s fiscal management to ensure that it does not overpay. Auditing your landlord issued expenses is your right. Lease auditing has become a common and expected practice. Here are 6 indicators that suggest your business may benefit from conducting a lease audit.

1. Increases to the Building’s Operating Expenses 

Perform a basic trend analysis of annual operating expense obligation if you notice a significant increase. Inflation and changing market conditions can contribute to increased operating expenses but if there is a significant jump issued to you, ask questions. A large increase may be due to an impermissible capital project, expense categories not reflected in your base year, vendor changes, or above standard services.

2. New Property Owner

A change in property ownership might trigger a lease audit.
Management fee levels, new vendors, and changing service levels are common issues when a building changes ownership or management. Another concern is the tenant estoppel which, if not carefully worded, has the potential to sign away rights or leverage.

3. Building Renovations or Upgrades

Renovations and capital projects may be subject to your lease operating expenses exclusions. Every project should be audited for permissibility under your lease. While you are most likely obligated to reimburse the landlord for a genuine building operating cost, you probably are not obligated to reimburse your landlord for increasing the value of his or her building if it does not reduce building operating costs in the future. If your building underwent renovations and/or capital improvements in the past, those costs were most likely amortized across future years. You may still be able to avoid ongoing expenses if they prove to be impermissible per your lease exclusions.

4. Your Lease is Commencing or Expiring

Perhaps the most valuable times to perform a lease audit are at the commencement and expiration of
your lease. If you occupy under a base year lease, the valuation of your base year will have a material impact
on your leasehold expenses throughout the remainder of the term. It is in your interest to validate all
charges and to validate expense levels in year one so as to not undervalue your base year. Likewise, lease
audits should always be performed as a standard practice at any lease expiration. Not only might you lose
rights to recoup any overcharges after vacating the premises, but you may lose significant leverages after
relocating.

5. Dramatic Change in Building Occupancy Levels

Accounting for accurate building occupancy levels can have enormous implications for your operating
expense obligation. This can be magnified with regard to fixed versus variable expenses. If the vacancy
rate in your building is sizable, it benefits the fiscally conscious tenant to ensure that occupancy shifts are
accurately reflected within a given expense period.

6. Limited Support for Operating Expense Increase

A lease audit should automatically be triggered whenever an annual reconciliation is provided without sufficient back-up to verify expenses and calculations. Year-end reconciliations can carry significant financial impact. This is particularly true if your lease terms include caps or index-driven escalators. Any failure to timely challenge a landlord’s computations and/or inclusions may forfeit your rights thereafter. Accepting a rudimentary reconciliation is to trust your company’s finances to an outside party with a vested interest in maximizing its profits.

Any questions? Contact Ryan at  [email protected] or  (713) 840-8528.

Ryan J. Hartsell , SIOR, MRE, Principal, and Managing Partner of Oxford Partners LLC, focuses on reducing the cost and risk associated with leasing and purchasing office and industrial property. He is recognized by his clients for his attentiveness, market knowledge, and negotiation prowess. He holds a master’s degree in commercial real estate and a bachelor’s degree in finance. As a third generation Houstonian and Principal of Oxford Partners, he has a unique appreciation for the business owners’ challenges by way of his own personal experience, which translates into better representation and empathy for his clients.