There is sometimes confusion when it comes to leasing commercial properties, be it retail, office or industrial. Below we will try to shed some light on the key points in how rent is calculated.
A net lease is where all the costs associated with the property are charged back to the tenant. Rent is broken down into two separate categories: net rent and additional rent. Net rent is the amount of rent paid for the space. The additional rent is the set of costs associated with the space – these are billed back to the tenant. These costs can include utilities, repairs, maintenance, property taxes, insurance and management fees. Landlords are generally only responsible for structural repairs, capital cost items, mortgage payments and income tax (either corporate or personal).
A gross lease is generally when a tenant pays a landlord one monthly amount (plus HST) which includes all costs associated with the premises, such as maintenance, management and utilities. Typically, tenants are responsible for their own cost of communication and internet services.
In addition to gross and net leases, there are number of variations of both net and gross. For example, a gross lease may not include utilities or janitorial services in an office situation.
It is important to understand what you are responsible for as a tenant or landlord. Ideally, this should be done in the initial stages while exploring the tenant’s options so that a proper comparison can be made before deciding on a location. The list at the bottom indicates the costs that might be related to the property.
Stands for “taxes, maintenance and insurance”; generally used for industrial lease purposes and single- tenant properties.
Stands for “common area maintenance”; this is generally for office and retail properties but can also be used for industrial properties. It includes the costs associated with operating the property as well as utilities, and is generally calculated by square foot (SF).
It is important that tenants understand their obligations before entering into a lease to avoid any unsuspected costs. For this reason we recommend seeking the professional advice of a commercial realtor or a lawyer who practices commercial real estate.
Rentable vs Useable area
Useable area refers to the parts of the space actually being used. Rentable area refers to the combination of useable area and a percentage of the common areas of the property, such as washrooms, hallways, lobbies, stairwells, sprinklers, electrical units, and boiler rooms. The percentage of common area attributed to the space is known as the “gross up”. The gross up is calculated by dividing the total useable area by the gross building area.
Types of Costs
Refers to base rent (fixed cost), taxes, utilities, maintenance, insurance, management fees, utilities (are there common or separate meters) and janitorial services (could be referred to as variable costs).
Units of cost
Industrial and office space are usually talked about by the cost per square foot per year.
Written by: Sydney Hamber