Lease used almost exclusively for multi-tenant office buildings, a full service lease is a situation where everything is included in the rent. The landlord pays all of the property’s operating expenses including maintenance, taxes and insurance. In this type of lease the landlord typically provides the following services:
Note: When using a Full Service Lease in a typical multi-story office building, the Tenant will be introduced to the concept of Load Factors.
A “Load Factor” becomes necessary when the Tenant uses a certain square footage inside their offices, but also shares in the hallways, bathrooms, elevators, lobby, etc. Therefore, a calculation is done to determine how much of the building’s space is devoted to these common areas, and that “Load Factor” is added in to the Tenant’s square footage. In other words, if twenty percent of the building is devoted to common areas, then twenty percent more footage is added to the Tenant’s “usable” area.
In this type of lease the tenant pays the landlord a gross amount for rent, plus sales tax where applicable. The landlord then pays the property's operating expenses such as property taxes, insurance, management or maintenance costs from the income they receive. The Tenant may be responsible for electric, telephone, and possibly water & sewer charges depending on the verbiage of the lease document. In addition, a CAM, common area charge, may be assessed to alleviate the cost associated with maintaining the property or public utilities paid by the landlord.
With some gross leases, the landlord may put an expense stop provision in the lease. In this type of clause the tenant pays the excess over a specified ceiling on operating costs. For example, the owner of an office building may require tenants to pay for heating and air conditioning if costs exceed $1.25 per square foot as well as any increases in taxes over the base year.
Most common with today's commercial properties, the Triple Net Lease,also known as a net lease, directs the tenant to pay the landlord a “Base Rent” which is net of property expenses, PLUS an additional amount for tenant's share of the property's expenses such as property taxes, insurance, common area maintenance (C.A.M.), management, etc.
Many times this is referred to as a "triple net" lease in reference to base rent being "net" of: 1. Property taxes 2. Insurance 3. Common Area Maintenance
The rate is the monthly rental rate for a given period of time. This is quoted in actual dollars and in dollars per square feet. The rates usually quoted on the phone or initially are for one(1) year rates and a prospective tenant should inquire for a better rate on a longer term
During the initial lease term, the landlord may offer a fixed rate over the term of the lease or offer yearly adjustments. Rent can either be adjusted by a dollar amount, a fixed percentage or tied to a fixed index such as the Consumer Price Index(CPI) or inflation
The length of the lease is usually a very important issue. Some Landlords may want a long lease for financial stability, others may prefer a short lease because of hopes that rental rates may rise in the short term future. Tenants may want a short lease in case of a decline in their business, or if their business becomes more profitable and they need more space for expansion purposes. Other tenants may want a LONGER term lease because of their large investment in tenant improvements or amount of money spent advertising a new location. There are usually monetary advantages to longer leases for the tenant; such as small annual adjustments, lower start rates.
By offering free rent, the landlord can attract more tenants to the building, especially start-up businesses that need the rent abatement for the first month of their move. The amount of free rent offered depends on current market conditions, the vacancy rate in the subject building, and the financial strength of the tenant. The amount of free rent can range from zero to 3 months per year of lease length (three year lease equals nine months of free rent).
The tenant can use the free rent "up-front" in the first year of the lease. Depending on the credit worthiness of the Tenant and the market demand for space, the landlord may insist that any free rent be spread over the lease term. This way, the tenant will not use the free rent period and then vacate soon thereafter. An example would be when a tenant receives every 12th month free, until the credit is depleted.
Many landlords may require that the tenant personally guarantee the lease. Usually the owner of the business acts as personal guarantor. By guaranteeing the lease, the owner can be sued personally by the landlord upon default by the tenant.
The lease should describe the location in the center, the size of the space and the method used to measure the space, so that disputes don’t arise at a later date.
The space that a tenant actually uses is termed "usable", while the space that the tenant rents is termed "Rentable"". In most cases usable and Rentable square feet differ. It is best to ask before renting. How much of the “Rentable space is common area? Where does the landlord measure from, the center of the wall, the drip line, etc.? Common area would include bathrooms, hallways and conference areas tenants may share.
The tenant must obtain their own liability and tenant insurance for the contents of the space including inventory and tenant improvements. The landlord may specify the specific dollar amount of liability coverage required by the Tenant. In addition, the Landlord will also insure the building in respects to liability and property damage. While the landlord’s and tenant’s liability coverage may overlap, the property insurance covered by the Landlord includes everything except the interior contents of the tenants space. Most leases require you to provide the Landlord with proof of insurance.
The lease should state who is responsible for paying the taxes which may be levied on the premises. With a triple net lease the tenant definitely pays. Any CAM Common Area Maintenance Charge could offset a landlord’s tax cost, but it is usually only understood to be charged in a net or triple-net lease.
This clause specifies who makes repairs to the premises. Obviously, it would be ideal for the landlord to make all of the exterior and interior repairs. Usually this is not the case. Typically the landlord will make major repairs only such as roof leaks and replacement. Some tenants have not read this section carefully and were later surprised when they experience electrical , plumbing, or air conditioning problems and find that they, not their landlord, are responsible for these repairs.
What happens if the Tenant makes major changes to the premises and then vacates, leaving the Landlord with an expensive mess to cleanup? What if the improvements do not meet code requirements, or were constructed without permits? That is the reason for this clause. Typically, the landlord simply reserves the right to approve all of the construction work done to the Tenant’s premises. Tenant shows Landlord the plans and permits, Landlord gives approval. A Tenant should always assume that the cost to resume the property to it’s original state is their own.
This clause specifies the conditions if the tenant stays beyond the term of the lease. Usually it states what conditions and terms of the lease apply as well as any increase in rent during this hold over period.
These will be self explanatory, and usually cover items such as parking regulations, sign requirements, limitations on noise and smell, etc. The rules govern how your business and the other tenants must act , and are in everyone’s best interest.