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Net rent, base rent, minimum rent, gross rent, additional rent, TMI and CAM are all jargon terms used by landlords and commercial real estate agents. They all refer to money to be paid by tenants to landlords, and some of them refer to profit for the landlord (net, base and minimum), while others refer to rent to be paid by tenants that cover building expenses (additional rent, TMI and CAM).
The best way to think of it is that the net rent is the net profit for the landlord.
Why so many synonyms for such a simple concept?
We have seen plenty of leases in which the landlord will define the net rent in the definitions section, and then reference it as basic rent and minimum rent throughout the rest of the lease.
Additional rent, TMI (taxes, maintenance and insurance), and CAM (common area maintenance) are all terms used to describe the carrying costs of the building.
Think of them as the landlord's overhead.
A gross lease is just the (Base Rent or Net Rent or Minimum Rent) PLUS the (Additional Rent or TMI or CAM).
Note that landlords have an incentive to keep the overhead low.
That allows them to be competitive with other buildings.
With a low additional rent a landlord can either beat the market on overall price, or can match the market but have more profit (with a lower additional rent but a higher net rent).
For example (from a recent case study in Texas):
Building 1 - $20 net rental rate, plus additional rent of $25 is $45 gross per square foot per annum. Therefore a 1,000 square foot tenant would pay $45,000 in annual rent ($45 gross x 1,000) and the landlord would retain $20,000 in profit ($20 net x 1,000).
Building 2 - $20 net rental rate, and the landlord operates his building more efficiently and additional rent is $22. Therefore that same 1,000 square foot tenant would pay $42,000 in annual rent ($42 gross x 1,000) and the landlord would retain the same profit ($20 net x 1,000).
The Building 2 landlord now has the choice to keep the net rent the same and offer a lower total cost to tenants, or can dip into that savings via a higher net rent, and therefore higher profit.
For example, if he increased the net rent to $22, his profit would increase by $2,000 annually, while also offering a $1,000 annual savings to prospective tenants vs. Building 1.
Most landlords like high net rental rates (a brilliant observation brought to you by our research department).
The real benefit is the powerful value it has on building valuation (think of it as every dollar of net rent is about a 6x multiple on the value of the building).
Therefore landlords usually prioritize achieving high rental rates, even if they have to give you other incentives (free rent, cash).
As office space is more of a commodity than retail or industrial space, it is not uncommon to have a 5 year lease at a flat rental rate.
A 10 year equivalent often would have a $2 bump on the back 5 years (though this can vary from market to market).
Retail and industrial landlords are normally more keen on seeing a lift on net rent each year.
Five percent is the general rule.
Keep in mind that markets go up and they go down.
Most landlords want to take the rent in the last year of a lease and keep escalating that into the renewal term.
Ensure that if the market has gone down that they renewal rental rate be lowered from what you paid in the last year of your lease.
1) Are escalations fixed or tied to a variable metric, like a consumer price index?
2) Is there a back up index in case the current index becomes discontinued?
3) Does it include or exclude amortized incentives like a tenant improvement allowance?
4) Is there a cap on the escalations?
5) Are any items excluded from the cap because they are beyond the landlord's control (for example, realty taxes)?
6) Is the tenant protected if the escalations exceed the then fair market value?
7) Can the adjustments also go down as well as up?
8) If adjustments are made by appraisal, who chooses the appraiser(s), who pays, and what are the qualifications of such appraisers?
A gross lease is an all in number for the tenant while the landlord takes the risk of increases to the additional rent.
The good news is that if overhead increases (sometimes beyond the landlord's control - such as realty taxes), then it is on the landlord to absorb that cost.
The bad news is that you may be overpaying, and further if costs go down they are not passed along to you, as would be the case of a net lease.
1) Is rent payable proportionate for partial months?
2) Is there a late fee charge or interest on late rental payments? Are these fees excessive?
3) If the interest rate floats with prime, is it enforceable in your jurisdiction?
4) Is the rent late by a specified date (for example 5 days into the next month), or by notice from the landlord?
5) Is payment of rent determined by the tenant mailing or the landlord receiving?
6) Is there rent abatement in the event the landlord is delayed in providing possession of the premises?
7) Is there a personal indemnification in the lease?
If you enjoyed this article, we would recommend reading Realty Tax Gross Up: What You Need to Know and find out about how we saved a tenant $60,000 in additional rent reconciliations.
Still stuck on base rent, additional rent, CAM and TMI? Check out this short video to see how we may be able to help.