By: Levi F. Smith, Esq., Principal, Principal Associates
Brokers and owners have their own language which often mystifies the person who must deal with the office lease every 3 to 10 years. Here are some simple definitions of the more commonly used terms:
Triple Net Rent. This is not 3 hoops. It is a base rent that does not include any of the operating expenses such as utilities insurance, janitorial, real estate taxes, etc.
Gross Leaseable Area. This is not a particularly ugly, unkempt suite, it just refers to the total size of the building.
Vertical Penetrations. This is not an off color reference. It represents the vertical shafts for elevators and heating, ventilating and air conditioning (HVAC) which are not included in rentable square footage (RSF) measurement under BOMA standards (Building Owners and Managers Association).
HVAC. A commonly used acronym for heating, ventilation and air conditioning.
Rentable vs Usable (Office Buildings). In the 1980’s Detroit area landlords adopted the practice of charging tenants for the area within the building beyond tenant’s actual physical space that was common in the big cities on the East and West coasts. It has become virtually universal today and in practice means that Landlords will typically add 10-15% of usable square feet to the tenant’s area to cover the cost of common areas such as hallways, bathrooms and lobbies. Rent is paid on the rentable size of the suite.
How is usable office space area measured? Usable space is typically measured ½ way into the demising wall with your neighbor; to the inside wall of the corridor and into the prominent part of a window wall. If your space includes windows and the glass is over 50% of the wall, usable space is measured to the inside of the glass. If the drywall is over 50% of the wall area, space is measured to the inside of the wall.
Annual Escalation. To ensure landlords gets a predictable return on investment, rent is escalated annually to re-capture the increases in operating expenses such as janitorial service and trash removal that increase in response to inflationary pressures in the economy. For example, a lease will state a base year for operating expenses and taxes, of $9.00/sf. If in year two, they increase by 2% for inflation, $0.18/sf is passed on to the tenant.
Another common annual escalation is base rent increase. Landlords will often ask for an annual dollar amount per square footage increase (ie, $.50/sf) or a percentage. This is in addition to the pass-through over the base year described immediately above and is intended to counteract the loss of value of the dollar due to inflation.
TI (Tenant Improvement) Allowance. The TI Allowance is the amount a landlord is willing to invest in the rental space on behalf of the Tenant. The cost for paint and new carpet, for example, is approximately $5.00/sf. A new medical build-out with plumbing, cabinetry, etc., however, may cost upwards of $50.00/sf. The allowance is negotiable and landlords will take into consideration your credit, their credit (how much can they borrow), lease term and usability by tenant who comes after your term expires to determine amount.
Non-Disturbance Clause. A lease should have such a clause to protect the tenant. If the building is sold during the lease term, by law the new landlord is bound by your lease. However, if the current landlord defaults on his mortgage and the property goes back to lender, the lender is not bound by your lease! To protect yourself, have the existing and any future lender agree to a lease paragraph that says as long as you are in good standing, your lease will not be disturbed during the lease term.
You have learned a new language. Test to follow.