Commercial Real Estate 101 – Chapter 4: Additional Rent (1 of 2)

A lease abstract is a document that summarizes specific, key information from a lease agreement. Leases can be lengthy documents with confusing legalese. Lease abstracts allow users to easily reference and review fundamental lease terms to ensure that both the tenant and landlord are in compliance with applicable obligations, timeframes, etc.

This series will go through a typical lease abstract and explain the various terms and what is important for a tenant to understand.  

CAM/Operating Expenses

  • CAM stands for common area maintenance and is synonymous with operating expenses. These are the costs associated with operating and maintaining the subject property. Leases will generally provide a list of costs included and excluded from operating expenses.
  • What’s important – Rental structure, what is included/excluded from operating expenses, historical records/variations, tenant’s proportionate share, audit provisions, etc. In full service leases, operating expenses are included in the basic annual rent. Tenant is only responsible for its pro rata share of any increases in operating expenses in subsequent years over the lease term. A review of the past few years operating expenses is advised. Caps on controllable operating expenses are a point of negotiation. In triple net leases, operating expenses are not included in the basic annual rent and must be paid separately. Tenant’s right to audit landlord’s books is a point of negotiation. Fixed annual increases in lieu of “passthroughs” is a point of negotiation.

Real Estate Taxes

  • Any and all general and special taxes levied against the subject property.
  • What’s important – Tenant’s proportionate share, special assessments, etc. Real estate taxes are levied by the governing body in which the subject property is located and is generally outside landlord or tenant’s control. Landlord may contest amount of real estate taxes.

Base Year/Expense

  • Applicable in full service or modified gross leases, is the amount of actual or “grossed up” operating expenses and real estate taxes in the first calendar year of the lease term. Tenant is responsible for its pro rate share of any increases in operating expenses and real estate taxes over the Base Year. Uncontrollable expenses, i.e. snow removal are generally excluded from the Base Year.
  • What’s important – Tenant’s proportionate share, amount of Base Year expenses, historical records/increases. Tenants are charged for increases but generally do not receive credits for any decreases in operating expenses or real estate taxes.

Gross Up

  • Process by which landlord calculates tenant’s proportionate share of operating expenses for a property that is less than fully occupied. Landlord increases its calculation of those expenses that vary with occupancy to reflect the amount of the expenses if the building were fully occupied or percentage thereof.
  • What’s important – Amount of the increase/”gross up.” Provisions can range from 90% occupancy to fully leased.

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