Strategizing a New Business Location
Who pays for what?
It all depends on what type of lease you have. If it is a typical retail store or commercial building lease, it will be a triple net lease aka NNN lease. In a triple net lease, the tenant is responsible for practically every expense incurred in operating the shopping center. NNN expenses will range from as low as $.35-.40 per SF and as high as $.90-1.00 per SF in Malls. The expenses include everything from maintenance and repair items to capital improvements to the center which may or may not be amortized and then billed to the tenant.
Capital improvements fall under two categories; mandatory and non-mandatory. Yet most all leases include both. So, if the building you are leasing is old and in need of updating, i.e. cosmetic upgrades, that cost is paid for by the landlord and passed through to the tenant. An example of a mandatory improvement would be that of ADA regulations, whereas handicap ramps may have to be installed. These lease provisions typically contain language “including but not limited to.”
If an item is not mentioned, it can be billed to the tenants as well. If you have a full-service office lease, aka “gross lease,” then the landlord pays the base expenses and the tenant pays any increase in expenses over the base year of the lease. This includes nearly all the same expenses contained in a retail or commercial lease. The increase in building expenses for any type of commercial property is either in control of the landlord or not.
If the building is sold for a higher value then previously paid, the increase in taxes is passed on to all tenants regardless of the type of lease. Even though this is an increase in taxes out of the landlords’ control, some adjustments can be negotiated prior to signing a lease. Other items like management fees or insurance costs are within the landlords’ reasonable control and can be competitively shopped since they are not government entities.
Landlords are required to provide a statement to the tenant showing the monies owed, however, the form and type of statement is up to the landlord unless specifically stated otherwise. If there is no specific standard set for the billing, then the tenant has to take the landlords word for it that costs went up from the year before.
(published in The Valley Business Journal)
[photo: brevity isn’t funny]
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