Understanding Commercial Real Estate Lease Terms
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Lease Hold Terminology
In this Posting Eastern Carolina Commercial Real Estate is going to provide some definitions of the language we use in Negotiating Lease’s when representing a Landlord or a Tenant. The Terms can from time to time be confusing and some of the terminology may not apply to a certain property type.
TICAM is a major influencing factor in any lease. It adds overall cost as a pass through from the Landlord to the Tenant. TICAM is composed of three main parts, Taxes, Insurance and Common Area Maintenance. Taxes and Insurance are usually the most fixed of the three components as you get an annual insurance rate and an annual tax rate as assessed by the City or County the property you own or are looking at resides in.
Keep in mind that you will always have a County Tax to pay, so by looking at property within a City you will be paying a higher T. For example, by leasing in the City of Wilmington, NC you the T consists of City of Wilmington Taxes and New Hanover County Taxes, however if you are looking in the County, the T there will only consist of New Hanover County Taxes. This is true for other coastal municipalities such as Shallotte, Southport, Leland, Carolina Beach, Wrightsville Beach, Jacksonville, New Bern, Greenville and Burgaw. Hampstead however is an area that is not incorporated so your T there is just Pender County Taxes.
Common Area Maintenance Costs are usually assumed to be a certain rate and upon an annual reconciliation there may be some overage you are responsible or you may receive a credit if the Landlord was able to get better pricing from contractors working on the property.
Depending on the Landlord you may be paying some items such as a Marketing Fund Fee for the property or a management fee or other items. It is always important to know what the Landlords CAM consists of. Landlords on occasion are willing to waive certain expenses that they are passing through, this is more an exception than a rule.
Rental Abatement Period
This is a negotiated time frame between a Landlord and Tenant where the Landlord is allowing time either inside or outside of the lease to complete a build out on the space which will make it work for the tenant. Typically the time line for the Abatement Period can vary from as little as 30 to as much as 120 days. A lot of what goes into the consideration is the time to get plans, permits, work completed and inspected, stocked a training period and then when you open for business rental starts. Many time you will encounter a “earlier of” clause, which refers to the time period or opening for business which ever comes earlier.
What is a Gross Lease?
A gross lease is where the Tenant pays a fixed rental rate and the Landlord pays all of the operating expenses. IE a property may be advertised as a Gross Lease of “X” dollars, and may typically be higher than other properties of comparable size however many of the expenses are typically covered such as: The Landlord pays expenses such as insurance, real estate taxes, utilities and common area maintenance (CAM). The Tenant would then be responsible for the rent and any specific business-oriented expenses. Due to the Landlord assuming inflation risks by allowing the Tenant to pay a fixed sum every month. This model of leasing is prevalent in smaller properties owned by individual investors rather than corporate landlords. Office Space Rental is a more common Gross Lease area than a Retail Property.
What is a Net Lease?
A Net lease is a lease where the Tenant is responsible for some or all of the expenses such as insurance, real estate taxes, utilities, janitorial services and common area maintenance. Historically there have been other kinds of Net Lease arrangement but we will focus on the most prevalent form in today’s business climate the NNN or Triple Net Lease.
What is a Triple Net Lease?
A triple net lease is currently the most prevalent form of leasing commercial space. In this Lease the Tenant and Landlord Agree to a Base Rental Rate. The Tenant is then responsible for the TICAM on top of the agreed to Base Rental Rate. The Landlord as a result is responsible for paying those costs encompassed under the TICAM for the property. TICAM is the component which is static, base rental however is negotiable. Here is an example below.
Property is advertised at $16.00 per sf base with NNN or TICAM of $3.00 per sf.
Total Rental is $19.00 per sf.
Tenant negotiates a base rental of $14.00 per sf +NNN or TICAM costs for a rental of $17.00 psf.
What kind of Lease makes sense for you? Would a gross lease inure to your benefit or would a NNN lease work to your benefit? Can you get a Tenant Allowance from the Landlord? Can you get a Rental Abatement period which coincides with your build out period? These are not terribly hard things for consideration, however navigating all of them can be a bit of a hurdle. Call ECCRE at (910) 399 4602 and ask for any of our brokers, we are more than happy to assist you in your search for a suitable lease property.