Last week, we covered what you need to know about your commercial lease, in this article we will break down the types of leases you may be required to pay and the terminology behind commercial leasing. There are two common types of leases your business may be subject to, what you pay will be determined in the negotiation of your lease.
How a monthly lease is calculated
Commercial leases start with a net amount, which is measured by the cost per square foot of space. This is why when you browse through Niagara commercial real estate listings you will see spaces like this Beamsville-based retail lease listed as $16-$20 per sq. ft. You take the cost per square foot multiply that by the amount of space you are leasing and divide that number by 12 to get your net monthly rent.
There are two elements to your rent, your base rent and then your additional rent. The additional rent you may pay is either TMI or CMA.
Commercial Lease Terminology
Though terminology is interchanged in the market, your additional rent will likely refer to:
TMI - tax, maintenance and insurance
TMI includes fees for property tax, building maintenance and building insurance, you are also responsible for your businesses own insurance. In most commercial leases, TMI changes annually to adjust to actuals, at the end of each calendar year your landlord will send out a statement of the actual TMI versus the budgeted TMI, this is because the landlord does not receive their final tax bill until the beginning of the new year. The TMI is budgeted from the previous year, so at the end of each year you may owe the landlord or the landlord may owe your business rent back.
CMA - Common Area Maintenance
The CMA is a percentage of the common area fee, your CMA is determined by your percentage of the building. If the building is 10,000 square feet and you rent 1,000 square feet, your CMA should be 10% of the buildings total CMA fees. You should not pay 100% of the CMA, even if the building has units for lease.
It is very important as a tenant to hone into the language surrounding TMI and CMA in your lease, most prudent landlords won’t include huge increases (i.e. for building maintenance/capital expenses) however it’s a risk you take when you sign a lease. Your commercial real estate advisor can give you an idea of the TMI or CMA you pay each year based off the amounts paid in the previous years.
The types of commercial leases you may sign
Net or Triple-net leases
Net or triple net leases include base rent and TMI.
A gross lease assigns a flat monthly amount for your business, where the landlord handles all operating expenses of the building. Gross leases are more typical of office towers because they offer shared services, where each space may not have separate utility metres. With fully gross leases your rent each year can rise, as property taxes and utilities increase, your landlord may adjust your portion of the rent to accommodate the new market expenses.
Some tenants will request a cap lease, this is where a tenant is willing to pay the base rent and TMI but they want to cap the TMI. For instance, tenants may request that the TMI cannot increase more than 5% over their lease term.
The percentage lease, takes a percentage of your gross income combined with a fixed monthly rate to determine your rent amount. There are cases where your lease may be a percentage of gross sales, typically more found in a retail setting. Sometimes negotiations can include a base rent and a percentage of gross sales, a hybrid lease, base plus. These leases are not as common as they were previous as they can be risky for the landlord.