FSG-NNN-MG-IG Is this a new Pro League?
In a way, you may be right. The Landlord is a real estate professional. In all probability, you are not. A professional basketball player seems to have all the tools to win the big basketball game. Guess what? The Landlord has all the tools to win at the game of leasing. In another chapter we brought to your attention to the basic lease contract and asked you to try and determine if you had the appropriate lease for the type building you were in.
OK, now you figured out you probably have an office lease since it says "Standard Office Lease" at the top. By the way, landlords love to call THEIR lease "standard." Makes you think everyone uses it so why change what everyone else uses. Secondly, you are sitting on the sixteenth floor so this must be considered an office building. But what do all those initials mean?
Let's start with some basics. A tenant (that's you, of course) pays the landlord a sum of money, usually referred to in the lease as "base rent" for the privilege of operating their business in the building. Where it gets complex is how the different landlords define base rent.
For most tenants in the southern California area, a lease will be defined as FSG which stands for Full Service Gross. Simply put, you pay the landlord some predetermined fee each month during the term and that's it. Should you use something extra such as additional after hour air conditioning (HVAC), there might be a set hourly fee the landlord can collect as "additional rent." It's sort of like going to the Hilton and paying for the room but you make seventeen phone calls, watch a movie, and eat a package of $9.00 peanuts from the food bar. OOPS!!!
IT IS VITAL YOU PAY ATTENTION TO THE ADDITIONAL RENT!!!! It could be a bottomless pit for the sole benefit of the landlord. It could include not only the peanuts, but anything else the landlord thinks the tenant should have to pay for either individually or on a "Pro-Rata" basis with other tenants in the building. That's where you need to understand all those initials BEFORE signing the lease. An $18.00 per year base rent may actually cost you $24.00 when the landlord gets through with you.
Hold on...here we go.
A landlord has three financial considerations. First, he wants to get a return on his initial down payment. Let's say that's $20M. Now he has to pay the mortgage holder another $140M. Finally, it costs him $1.5M per year to operate the building and pay for such items as taxes, maintenance, utilities, and insurance. That's where the letters come in. In a FSG (remember full service gross-that's gooood) lease, the landlord usually has language in the lease that, should the expenses go up after the first year, the tenant must pay a fair portion of that increase. Be aware that additional cost can be defined by a Base Year or an Expense Stop which we'll discuss in another chapter.
In each of the other scenarios, MG (Modified Gross), IG (Industrial Gross) or NNN (Net Lease or commonly called Triple Net), the Tenant pays a base rent which covers investment and debt service but must then pay all or part of the maintenance costs either directly to vendor or to the Landlord who pays the appropriate agency or vendor on your (actually HIS) behalf. Even that gets tricky. If you are in an industrial building, you probably have a NNN lease and you pay all the bills. However, if you are in an industrial park or some office buildings, you may pay some costs such as utilities directly to the electric or gas company but the other costs are paid to the landlord. To try to explain away or justify those costs, the landlord probably sends you a "Yearly Reconciliation" statement which gives you some cryptic explanation of what he spent your money on to maintain the property.
You need to review that statement carefully. You don't want to be paying you someone's kid's trip to ski in Europe. Or maybe you don't care as long as the costs only increased 2% or 3% a year.
Before you sign a new lease, understand the TOTAL financial obligation. Don't just look at the base rental rat and multiply it by the square footage. Have a broker, attorney, or accountant review the section of the lease that defines any additional rent. That is negotiable. Recently, IN/House completed a transaction for a 501-C corporation (non-profit). We stipulated that the landlord would refund the tenant's portion of the real property taxes attributed to the tenant's premises provided the tenant applies to the county for the refund and it is granted. IN/house has already returned thousands of dollars to 501-C clients in this manner.
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