Even though real estate costs represent the 2nd or 3rd top expense item on most income statements, for many business owners, leasing commercial office, retail or industrial space is something which is only tackled every 3, 5, 7 or 10 years. For this reason, it can be a daunting task purely based on inexperience.
Not only are many commercial real estate industry practices confusing to the less experienced, there are other gimmicks which can lead to even more confusion. Here is a list of four of my favorite.
1. Free rent outside the term. All this really means is that the landlord is adding any free rent period to the overall lease term (i.e. making it a longer lease). If you're getting 6 months free rent "outside" the term of a 5 year lease, it is just a nice way of saying your signing a lease for 5 1/2 years. Don't get me wrong, free rent is a great thing, especially when it is at the beginning of the lease, but if it is outside the term, you're gonna be obligated to perform under the lease for its entire duration. Another similar gimmick is messing with various dates within the lease possession, occupancy, rent commencement, lease commencement date, etc.
2. Arbitrary Common Area Factors. Many landlords simply make up what the common area factor of their building is. For some landlords, it is a way to "grow" a building over time without spending a single dollar. As a tenant be sure your lease stipulates these measurements are derived using BOMA Measurement Standards. Otherwise, the landlord can basically make it anything they want it to be. Also, be sure you understand the difference between the Rentable Area and the Useable Area.
3. Tenant Improvement Allowance on USF. Some landlords like to offer tenant improvement allowance on the Useable Area, rather than the Rentable Area. This tactic can save them anywhere between 5% and 15% on the total allowance package. As a tenant just remember, if you are comparing deals and one landlord quotes you an Allowance on a USF basis, be sure to adjust it accordingly so that it is an apples-to-apple comparison.
4. Expense Stop Manipulation. Okay, so manipulation may be a bit strong, but many times that is what it amounts to. As a tenant, if you agree to any type of expense stop, make certain you know what your exposure is. This means answering the following questions (i) what were the building's operating expenses last year? (ii) what are they estimated to be next year? (iii) when are real estate taxes reassessed? (iv) is there a clause which requires the Landlord to Gross up the Base Year based on a specific occupancy rate? If so, what is this occupancy rate? (v) what, if any, capital repair costs are you exposed to? (vi) do you have a right to audit or contest the landlord's books and calculations?