You need to understand the type of lease you are negotiating when dealing with commercial real estate properties.  You may be incurring legal responsibilities for costs you might not have anticipated if you don’t understand the nature of the lease.

GROSS LEASE

This is a lease where the tenant pays one singe charge to the owner.  All utilities, building maintenance, and operating costs are paid by the owner.

NNN LEASE or TRIPLE NET LEASE

A NNN Lease is a Lease where the tenant pays their pro-rata share of real property taxes, insurance and operating expenses.

CAM LEASE or COMMON AREA MAINTENANCE LEASE

A CAM Lease is very similar but is used in retail environments locally, at least.  Retail properties can often have common areas for general use of all tenants or their guests and the respective tenants pay for the same items in the NNN lease, but since retail environments may have common use areas and typically more parking area, the leases are generally called CAM Leases.

SOME THINGS TO LOOK FOR ASSOCIATED WITH NNN AND CAM LEASES

In both NNN & CAM leases, tenants typically pay their pro-rata share of real property taxes, insurance, and operating expenses.  These expenses are generally estimated annually and paid monthly very similar to insurance and taxes paid on a residence through a mortgage / escrow company.  In theory, this is more efficient since the owner estimates the expenses each year and does not have to include a “risk” factor in case actual expenses are higher since all expenses are paid by the tenants (except those expenses attributable to vacant spaces, which are borne by the owner).  However, efficient as this may sound, there are some issues to look into when renting properties with NNN or CAM fees.

OVERHEAD FEE

Is the owner allowed to add a factor to the annual NNN / CAM fees?  In some leases, the owner may ask for an add-on factor to pay for administrative costs of estimating and collecting the fees.  Locally, the majority of leases do not have an add-on factor, but some range upwards of 10%.  If the owner does not have a property manager, an add-on might be appropriate.  On the other hand, if the owner does have a property manager AND there is an add-on fee, it is worth determining why that is.

LEASING AND MARKETING FEE

Leasing and marketing fees paid to acquire new tenants is generally a cost borne by the owner and should not be a fee paid by existing tenants.

Marketing costs to advertise the property for the benefit of existing tenants in a retail environment are generally specified and incurred with some level of tenant input.  Those costs are typically borne by the tenants on a pro-rata basis.

CAPITAL & MAINTENANCE EXPENSES

When leasing, make sure you understand how this issue is handled in the lease.  Typically, capital expenses are borne by the owner.  Some leases will give the owner the ability to do a cost – benefit analysis to see if a capital expenditure will reduce operating & / or maintenance expenses and, if so, to then include those costs in the NNN / CAM charges.

UTILITY COSTS (Water, electrical, sewage, trash, etc)

In most cases, with a NNN / CAM lease, the tenant pays for their cost of these utilities.  in some instances, one or more of the utilities may be provided by the owner to be billed directly to one or more tenants, or included in the NNN / CAM charges.  For instance, with a small industrial center with several small spaces, it may be more economical and / or efficient to have a single trash bin for common use.  In that case, the trash will be provided by the owner and all tenants pay their pro-rata share of the expense.  However, if one tenant uses an extraordinary amount of a utility, the owner should have that tenant arrange for their own service so other tenants are not unduly burdened by costs more appropriately borne by that tenant.

MAINTENANCE

This is the issue I am most interested in discussing with this blog.  Make sure you understand who is responsible for what costs in your lease.  Typically, the owner is responsible for the exterior and structural elements of the building.  As a tenant, you are typically responsible for HVAC maintenance, plumbing, electrical, etc…  So, if you are moving into a brand new building and the HVAC system needs to be replaced, you should be able to use the existing warranties.  But what if you’re about to move in to an existing space and do not know what the maintenance program has been for the HVAC system?  Or what if the last tenant drained oil into the sump system?  First of all, you need to have an inspection done if those elements are critical or are otherwise of concern to you.  You might even look at capping your exposure in case a major element of the space breaks, like the HVAC.

SUMMARY

Make sure you go over the draft lease with your leasing agent.  You should have already made sure you are working with a qualified commercial real estate agent.  Real estate agents without any or much experience in the technical aspects of leasing a commercial space may not be aware of the different issues important when leasing commercial facilities.

If you need assistance evaluating your commercial real estate needs, please feel free to contact us.

Sincerely,

The leasing process starts with an identified need on the part of the prospective tenant.

Identifying Space Size Requirements. What we often find is that the tenant may not know entirely what they need in terms of size (square footage) or zoning. In all fairness, several different sizes can work for any given tenant depending on the floorplan. For instance, some uses can use mezzanine storage which can be built in an existing space (if not already available) and other uses cannot adequately use mezzanine level space. Also keep in mind that not all realtors advertise mezzanine space the same since mezzanine space is generally perceived to be of less value as is basement space. A space may have some mezzanine available but not included in the “rentable” space calculations which will help when calculating NNNs or CAMs.

Note: Depending on the use and location (particularly in warehouse and retail applications), mezzanine, second floor space, and basement space is not of equal value to street level space. In office applications, the same may hold true depending on whether elevators are available.

Do You Have Flexibility On Your Floor Plan? Also, another thing we see is a company stating a certain square footage need, but may not realize that larger spaces may be more affordable. To restate that, too narrow a search may not reveal better values since the cost per square foot often goes down as the rentable size goes up since smaller spaces are generally less available / in higher demand and can command higher asking prices. With that in mind, we customarily perform searches from 75% of the target size to 200% of the target size to see if there are better value spaces available within that range.

Note: When performing searches to find “best value” remember to add in all costs of that space, not just the base rent. For example, if the rent per square foot or per rentable square foot is significantly less after adding additional rent (e.g.; NNNs or CAMs) and utility costs, make sure that “all in rent” still represents a good deal for you.

Clear Height Implications. In many industrial applications, users can high stack their products and the clear height is an important factor (with adequate racking, they can put more product in a smaller foot print), but make sure you know the building codes applicable to stacking. Depending on your product and the stacking height, the local fire marshal may require the sprinkler system to be modified to provide adquate coverage or the stacking height may be limited.

Note: Stacking Height may trigger additional sprinkler requirements – make sure you know if additional requirements are going to be imposed before signing a lease.

Zoning Requirements. The various political entities have different zoning requirements, sorry. We deal with this issue frequently and there is no single answer for the entire Treasure Valley. Boise is differnt than Meridian, Nampa, Eagle, Garden City, Star, Middleton, Mountain Home, and Caldwell. In one area, your use may be either allowed straight out, or be allowed based on administrative review, or upon application, hearing, and issuance of a conditional use permit (CUP), or straight out disallowed.

Note: Most communities have their zoning requirements posted on their web site. In those cases where there is any question, set up a meeting with the city’s planning & zoning help desk where you can speak directly with city representatives. Keep in mind, though, that uless it is in writing, those opinions are just that. It doesn’t happen often, but there have been instances of miscommunication between tenants and help desk personnel.

Parking Requirements. For call centers, above-average parking requirements limit available properties. The same holds true for parking of delivery vehicles or parts and equipment and food service (restaurants). Make sure you identify any special needs to your realtor.

Note: If you are in the food service industry (restaurants) or are looking for a call center or are a retailer looking for designated parking, remember that in multi-tenant centers, most parking is in common and owners may resist designated parking out of necessity. Be sure to address those issues early in the discussion.

Addressing Unresolved Issues. If you’ve found a great location, but have a few unresolved issues, tell your commercial realtor to issue a Letter of Intent (LOI) to the building owner and ask for a limited amount of time to resolve those unresolved issues.

I know this is a lot to absorb in a (not too) short blog. Feel free to contact us directly to discuss these issues further.