There's More to Your Occupancy Costs
Than Base Rent

 

Watch out for additional expenses. Somewhere in your lease (probably in section two or three), there's a paragraph titled "Additional Rent." Simply put, this is a definition of the additional costs you may incur during your tenancy. These costs can be paid either directly to the landlord or to a third party, such as the tax collector, insurance company, or a maintenance company. Depending on the type of lease you have, these items may be defined as simply "Additional Rent," Common Area Maintenance Charges" (CAM), or "Net Charges" (Triple Net or NNN). The important thing to know is that the amount you think is due based on what your broker may have negotiated as base rent may not (and in all probability is not) the total amount you will be paying to occupy that new space.

 

What about full service gross leases? Let's start with the most common office lease: the full service gross lease. In years past, you signed a lease that included everything. You paid a flat rate for the period of time you were in the space and at the end of the lease you negotiated a new term and rate. The landlord figured out how much it would cost him to run the building, make a profit, and increase the value of the property. As costs of operation began to jump, landlords decided they needed a hedge against the rising costs, and started including a fixed increase in rents based on some projected figure or by attaching the increase to some index (such as the Consumer Price Index (CPI)). In some ways, that was reasonable—you use the services; you pay your fair share.

 

What do you do when there appears to be increase on top of the increase? Somewhere along the line, tenants got used to paying fixed or percentage based increases, while landlords came up with another plan to extract more money from them. As a result, the concepts of the base year and expense stop came into vogue. Not only was the landlord going to raise the rent each year, but they were only going to pay for so much of the building operating expenses and require the tenant(s) to pay the difference. While there may be some justification for "step rents" in today's world, it is important to know why your base rent is increasing if the lease also includes an “additional rent” section. To many, this is a clear case of double dipping—increasing the rent to cover increasing operating costs plus charging for increases over the initial year’s operating costs. Are we the first to figure that out?