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Michigan Commercial Real Estate Broker & Tenant Representative

LEVI F. SMITH REAL ESTATE, INC

Licensed Attorney / Commercial Real Estate Agent
We tilt the playing field in your favor!
(248) 262-1807

 


COMMERCIAL PROPERTY LEASES
TRANSLATING "LANDLORDESE" TO ENGLISH

- Part I -
By Levi F. Smith, Esq.

As Published in Michigan Lawyers Weekly
March 17, 2003

Most real property leases are written with non-legal terms that read like Greek to the non-landlord. In fact, Microsoft Word often underlines them as misspellings or grammatically incorrect. This article will give you the tools to understand basic lease terms and beat the landlord at his/her own game. It is also essential to compare proposals from different buildings. Consider the following:

The premises have 10,000 rentable square feet. Rentable measurement is determined by BOMA Standards, 1996.

The load factor is 15%.

The rent shall be $20 per sf NNN.

Tenant improvement allowance is $20 per usable square foot, below the deck.

Services supplied will be comparable to other class A office buildings in the area. Renewal shall be at 95% of market rate of other class A office buildings in the area.

Annual increases will be based on increases in the porter wage or, annual increase shall be 3% of the base rent or CPI increase, whichever is greater.

Operating expenses and real estate tax increases over the base year will be passed through prorata.

Rent shall begin on the commencement date, not the possession date.

These terms were never covered in law school or the bar exam, but they were created by landlords to make you feel illiterate in your own country!

RENTABLE - You have 8,800 sf within your walls as determined by BOMA (Defined Below). The landlord adds 15% to charge you a part of the common areas-hallways, bathrooms, lobbies, telephone rooms etc.

LOAD FACTOR - This is the common area factor added to usable square feet to yield rentable square feet. We started seeing this term in the 1980’s as a way to subtly increase rental income to the landlord. It is also known as the landlord’s “finger on the scale”.

BOMA MEASUREMENT - Building Owners and Managers Association has created definitions of measurement. Demising walls are measured to the middle of the wall. Corridor walls are measured to the inside wall of the premises. Exterior walls are measured to the predominate feature. Predominate feature means that the window or the wall is more or less than 50% of the total surface.

Here is where BOMA gets risqué – “No vertical penetrations are included”! This means the area of elevator shafts, stairwells, and HVAC stacks are excluded from measurement. You can purchase a copy of BOMA’s 1996 Standard Method for Measuring Floor Area in Office Buildings for $36.75 by going online to: http://www.boma.org/pubs/floor96.htm.

If you are starting to think you need an architect to verify the landlord’s measurement, you are correct. Measurement mistakes, unintentional and intentional, are common and usually in the landlord’s favor! Several of our clients have saved over 10% when we suggested measuring their space.

NNN - Triple net charges are added to base rent for operating expenses and real estate taxes. Charges include your pro rata share of utilities, insurance, management, repairs and maintenance, janitorial service, waste removal, security, snow and lawn care. This should not include capital improvements such as a new roof or new parking lot. Triple net is an ala carte menu whereas gross is a complete dinner (see below).

GROSS RENT - Opposite of Triple net (NNN) rent. It includes base rent, operating expenses, real estate taxes, etc. (see above).

USABLE – “Usable square feet” is the space within your walls that you occupy and use exclusively.

ANNUAL ESCALATION - In today’s soft market, this is not a given. There is no statute that ordains an annual increase in a lease. Fairness usually means that the landlord be compensated for increases in operating expenses and taxes which currently approximate $10/sf in a class A office building. An inflationary increase or pro rata increase over the base year are fair. Beware of fixed or inflationary increases that are based on the base rent which not only compensates the landlord for inflation but increases his/her profit because mortgages are usually fixed.

Query if you get the benefit of decreases in operating expenses and real estate taxes. This occurred in 1994 with Proposition A property tax rollback in Michigan, but most leases were silent and landlords received a state sponsored windfall!

CPI is consumer price index increase as defined by the Federal Government. It is used less often because of difficulty of determination.

SUITE ELECTRIC - This is not a typo or opposite of “bitter electric”. Landlords charge for electricity used within your suite for lights and wall outlets. Often these are separately metered. Guess who pays for the meter? Electric for air conditioning is not included unless a heat pump system is used. Beware!

Continued in Part II


BIO: Levi F. Smith, a native Michigander, lives in West Bloomfield. After passing the bar in Michigan and California and practicing law for 6 years, he entered the commercial real estate field. In 1988 he founded the first corporate real estate firm, Levi F. Smith Real Estate, Inc. in Michigan to exclusively represent tenants and buyers. For more information, visit http://www.michigan-commercial-real-estate-properties.com


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