How are rental rate calculated and what is meant by triple net?

When comparing the quoted rental rates of various buildings, it is important to know what is included in the monthly payment and if there are any other quarterly or annual payments.

There are two main ways that rental rates are quoted: GROSS or TRIPLE NET.

With a gross lease, the tenant's rental payment includes the operating expenses of the building, i.e. a pro-rata share of the property taxes on the building, the property insurance and the common area maintenance ( snow removal, trash pick up, lawn maintenance, etc. ). With a triple net lease, these operating expenses are in addition to the rental rate.
EXAMPLE: Building "A" has a rental rate of $15.00/sf. gross plus utilities. There are no common hallways in the buildings (rentable sf. is the same as useable sf, more about this later.) Building "B" has a rental rate of $13.00/sf. triple net plus utilities. Building "B" may actually be more expensive than Building "A" if the pro-rata expenses (the triple net) exceeds $2.00/sf.

OTHER IMPORTANT TERMS:

Expense-stop- If a tenant is signing a gross lease, there may be a provision that enables the Landlord to pass on any pro-rata share of expenses over the base year. Using our example above, the lease for Building "A" may have an expense stop, such that the operating expenses calculated on the base year were $3.00/sf. and those expenses grew to $3.16/sf. The rental rate in the second year (barring any other rental rate increases) would be $15.16/sf.

Rentable Factor- In a building with common areas ( hallways, bathrooms, lunch area, etc. ), Landlord's include a rentable factor. While the Landlord may not totally include all the common areas in all the tenant's leases, the rental rate is calculated on rentable s.f. rather than useable s.f. I have seen this factor range from 10% to 14%.
EXAMPLE: A rental rate of $ 15.00 / rentable s.f. on a 2240 s.f. suite means that the tenant is actually leasing a suite that is 2000 s.f. The monthly rental payment is $ 2800.00 plus the utilities ( which may be separately metered or may be done on a pro-rata basis by footage ).

Triple Net Rent Reconciliation: Landlord's may not use this term explicitly, but in triple net leases there is a paragraph entitled "Additional Rent". This is the triple net paragraph ( or it may be done in multiple paragraphs under headings of Taxes, Insurance and CAM ( common area maintenance ). This paragraph provides the Landlord the ability to capture additional expenses that were unforeseen in the previous rental year of the Tenant by billing the Tenant in January of the next rental year.
EXAMPLE: At the time of the signing of the lease, the Landlord explains to the tenant that the rental rate is $13.00/sf. and the pro-rata share of the expenses have currently been running $2.79/sf. The Tenant leases the space (1200 sf.) with a monthly rental rate of $1579.00/sf. plus the utilities. The Tenant occupies the space in May of 2000 and the rental commencement is July 1, 2000.
• November and December of 2000 (hypothetically) have the largest snow falls in the history of Michigan. The Landlord needs to plow twice a week. While he uses an outside independent contractor, the rate is high due to the high demand. He finds at the end of the year, the triple net expenses have risen to $2.86/sf. All other items have remained stable.
• In this case, the Tenant would be presented a bill for $0.07/sf. times 1200 sf. or $84.00 as a reconciliation between what the pro-rata expenses are and what the tenant's collectively have paid for. Also, if Tenant's over-pay, they receive a credit to their rent.
One can imagine that Landlord's have to judiciously use this clause to prevent conflict or hard feelings between parties. With Proposal A in Michigan, property taxes, the largest component in the triple net have been stable. This has resulted in the lack of wide variations in triple net expenses. While sales of shopping centers resulting in transfers to new owners might cause large increases this component, those have been few in the current capital gain tax economic climate.

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