You will find different Types of Leases in
the commercial real estate market. The terms of the lease you sign will
include the method of compensation for "hidden costs" as well as your
base rent. Our Lease Calculator provides the means with which to produce preliminary estimations of your lease costs; our advisor will follow up with a thorough analysis of the leases terms.
If there is no operational reason to relocate when your current lease approaches expiration, our advisors can help you renegotiate the best lease renewal for your company.
Types of Leases
When a tenant signs a gross lease, the tenant agrees to pay a fixed amount
each month to cover the building's operating
expenses. This amount is subject to yearly increases in accordance
with the escalation methodology negotiated in the lease. Included in this negotiated amount
is an extra service charge to compensate the landlord for the increased
When a tenant signs a net lease, the tenant agrees to make two types of payments: i) the building's direct expenses, such as taxes, insurance and maintenance; and ii) a "base rent" amount above the direct expenses. In a net lease the tenant takes on all the risks of the owner's risks of actually running the building. If the tenant can reduce operating
expenses, the tenant's costs are also reduced; however, if the expenses increase, the tenant pays more. Net leases vary on an individual basis.
Rent Escalation Methods
Escalation allows the landlord to recover all increases
in operating costs from tenants on a pro-rata
basis over the selected base year. Some methods of escalation actually provide the
landlord with more than full recovery of increased costs.
There are three major types of operating escalation charges in the commercial real estate market: i) direct operating costs; ii) porter's wage; and iii) consumer price index (or other fixed percentage) escalations. Each type can have a significant impact on the cost of your lease.
- Direct Operating Costs
The landlord passes onto the tenant the actual increases in operating costs of the building. The total cost is per square foot and usually falls between $6.00 and $12.00. Below are lists of typically included and excluded costs.
| Included Pass-Through Costs
- Payroll for on-site personnel
- Building Insurance
- Management Fees
- Government Mandated Work
- General and Administrative Supplies
- Real Estate Tax
| Excluded Costs
- Franchise Taxes
- Capital Expenditures
- Leasing Expenses
- Ground Rent
- Legal Fees
- Asbestos Abatement
- Debt Service
Here is an overview that demonstrates the implications of each transaction:
- Porterís Wage Escalation
These yearly increases are contingent upon the fixed porter's wage. This escalation is the wage increase found in the Local 32 B-32 J union contract. Increases can be based on the hourly wage rate or the all-in wage rate, which includes fringe benefits. The current wage rate without fringes is $16.43 per hour and with fringes is $27.93 per hour. This method could give the landlord a higher recovery than his actual cost increases because the formula is based solely on this wage scale.
- CPI (Consumer Price Index) Increases & Fixed Percentage Rates
Historically, this is the least desirable escalation type for tenants. This escalation was used in loft and industrial buildings that had very low rental rates, $5.00 to $15.00 per square foot. These buildings provided limited services, no cleaning or attended lobby. It is now common to see this escalation in many buildings with rental rates much higher. Due to tight market conditions there are 3% to 3.5% fixed escalations on $40 to $50 rental rates. Currently, this rate should be capped if it is a CPI increase or lowered if it is a fixed percentage.
|Annual Cost Escalations of the Rental Rate
|Type of Increase
||Initial Cost Basis(1)(2)
||Add. Cost by Yr(2)
|1. Direct Operating
|| $ 8.00 / sq. ft. x 3%
||$0.24 / sq. ft.
|2. Porter's Wage(3)
||$16.43 / hour x 3%
||$0.45 / sq. ft.
|With Fringes Benefits
||$27.93 / hour x 3%
||$0.75 / sq. ft.
|3. CPI Increases
||$30.00 / sq. ft. x 3%
||$0.90 / sq. ft.
1All sq. ft. are on a per annum basis
2Assumes a 3% Consumers Price Index (CPI) inflation rate
3As per Local 32 B-32 J union 3-year contract
Security deposits depend on the longevity and the credit history of the company. The landlord will scrutinize the last few years of a companyís financial statements to assess if the company is credit-worthy. The credit history of the company will in part dictate the amount of the security deposit if the landlord decides to rent to the company at all.
If your company is established, be prepared to answer questions and have at least your last two full years of financial statements prepared by your accountant. Attach your financials to any offer you submit to lease space. In a tight market, time is of the essence. Being organized and prepared to negotiate will put you in a stronger position with the landlord.
If you are starting a new company and have little or no financial history, make sure you have a business plan, letters of reference from your bank and documentation of any funding you have received before it is time to meet with the landlord.
An established company with excellent credit often times will not need to leave a large security deposit. Deposits can be as much as 3 years' rent for young companies.