Understanding Occupancy Costs

Jan 3

1/3/2012 4:19 PM  RssIcon

Submitted by G. Bryant
Understanding and comparing occupancy of competing facility options can be challenging when rates are quoted in different terms. Tenants will encounter a myriad of different terms which will differ in definition from one Owner or broker to another.  To make things more difficult, different Owners include different things in their CAM, and sometimes expenses can get underestimated "accidentally-on-purpose" leaving Tenants with surprise increases during the lease terms.

The basic building blocks are:
"Base" Rent, also referred to as Net or Triple Net, this portion of the rent payment does not include the Tenant’s share of the Property Taxes, Property Insurance and Property Maintenance – think of it as your mortgage payment.

"Common Area Maintenance" (CAM) is the tenant’s share of the above referenced insurance and maintenance, and must be added to the Base Rent to establish the tenant’s total rent.  While this is expected to cover the cost of maintaining the building and grounds, it generally does not cover the cost of Premise maintenance, which is an additional Tenant expense.   Depending on the nature of the building and complex, CAMs may also include that portion of the utility expense that relates to the building cooling tower and boiler.

“Real Estate Taxes”
which includes Town, County and School taxes, is the Tenant share of the taxes imposed on the property.  Real Estate taxes can vary significantly according to where the property is located, the type and age of the property and whether the property benefits from one of several tax abatement programs.  Typical tax rates for office space range from $1.75/sf to $5.00/ sf

"Gross" rent is quoted when the Owner is a combining the Base Rent and Common Area Maintenance and real estate taxes into one lump sum.

Modified Gross” rent is used when the Owner wishes to include the Base Year CAM and/or real estate tax charges in the Base Rent, but will Pass-through increases over the Base Year charges. The Owner may pass-through increases in taxes, or CAMs, or both.

“Improvement Rent”
refers to the cost of funding improvement over and above how the space is offered to the Tenant.  A real and often times significant component of overall Occupancy Expense, the Improvement Rent may not appear as a monthly charge billed by the Landlord, or may be labeled Amortized Improvements or Amortization Rent. 
Depending on the age and nature of the space, it may be marketed with an Improvement Allowance or on an “As-Is” basis.  New “First Generation” or “Shell” space frequently comes with an improvement allowance; older space is often marketed As-Is.  The cost to customize the space to meet the needs of the Tenant is a real and often times significant cost whether it is borrowed from the Landlord and repaid as Amortization Rent, paid for in cash by the Tenant, or borrowed from a third party and repaid over the term of the lease.  In any event, this is a real cost and one which needs to be evaluated when comparing options.
CAM charges can vary significantly, depending on the type of building and operating systems.  Single story “Flex” buildings with dedicated HVAC systems in each suite may have CAMs as low a $1.25, while multi-story Class A office and Medical office buildings may see CAMs as high as $4.75.  It is important to understand what is included in the CAM charges, and what is not.  Do the CAMs include Management fees, Capital Repairs, Capital Replacements, base building utilities, Premises utilities, and if so, how are they calculated?  All important questions if you want to understand and accurately predict future costs.

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