Let’s take a minute to look a bit more in depth at the different kinds of leases and their associated expenses.
TYPES OF LEASES
There are 3 main kinds of leases:
1. A Triple Net Lease
2. A Modified Gross Lease
3. A Gross Lease
These leases can go by other names, but they all still fit into one of the above major categories.
CAM AND LEASE TYPE
Let’s start by defining what CAM is, CAM is an acronym which stands for Common Area Maintenance Charges. These charges are also sometimes called triple net charges or just additional lease charges. All these terms essentially mean the same thing.
In a “Triple Net Lease” – ALL expenses of the property lease are passed through to the tenants - based on their percentage of occupancy.
By all, I mean absolutely everything, including property taxes, management fees, legal fees. These charges usually add at least 50 cents a square foot to over dollar a square foot or more to the lease charges. So, when you are comparing locations and leases – make sure you are comparing apples to apples and you know the total lease cost.
It is important to ask how much the CAM is at the time you are signing the lease. That amount is not guaranteed, since it is supposed to be based on the actual expenses on the building, but should give you an idea of how much those expenses usually are. You want to figure it out on a per square foot basis – so you can easily compare the cost of one lease to another.
ORDINARY EXPENSES V. CAPITAL EXPENSES
In most leases, CAM expenses are dealt with differently depending on the type of expense. There are generally two main types of expenses: “ordinary expenses” and “capital expenses”
For example, a capital improvement – meaning an improvement that will be capitalized by the owner, like a major item – a roof, a new parking lot, something like that. These kinds of expenses are written off over a period of time by the building owner, depending on the useful life of the item. Therefore, the expenses should be collected from tenants over a period time as well. Many leases use twelve years for collection/reimbursement of capital improvements from tenants.
Asan example of a capitalized expense – if the building needs a new roof, and your portion of the roof is $12,000 – you would pay the landlord back a thousand dollars per year, divided by the 12 months per year, until your portion is paid off.
Most of the time, if the improvement comes in the last year or two of your occupancy, you can choose to move out rather than pay for the capital improvement– but that isn’t usually a very practical option for a dentist.
But ordinary expenses, which are most of the expenses in a building, are charged to the tenants in the year they are incurred. Ordinary expenses are things like: janitorial, water, trash, management, and you will pay those, according to your percentage of occupancy, on a monthly basis.
TRIPLE NET LEASES AND CAM
Triple Net Leases – which are generally Shopping Center leases – are by far the most expensive lease you can enter into because you are paying all the expenses – ordinary expenses and capital expenses - everything. I mean, sometimes they are worth it and sometimes great practices are in shopping centers – but I think it is the exception rather than the rule.
MODIFIED GROSS LEASES AND TRUE GROSS LEASES
Most professional building leases, and smaller shopping center leases are Modified Gross Leases. This means that you will pay your portion of expenses based on the INCREASE of building expenses after the year you move in. The year you move is called your Base Year.
As an example, if expenses for the building were $100,000 the year you moved in, and they increase to $120,000 the next year, you would only be responsible for your portion –based on your percentage of occupancy - of $20,000 – that is, the INCREASE. If the lease was a Triple Net lease, you’d be responsible for your portion of the entire $120,000. You can see that modified gross leases are much less expensive.
This is by far the most common type of lease.
The last type of lease is a True Gross Lease. This means that you pay NO expenses except your agreed upon rent.
This is unusual, at least in popular areas, but certainly still seen in more out of the way areas, or less desirable buildings.
CONCLUSION
I hope this helps you figure out what kind of lease you are looking at, and what the true cost of the lease actually is!
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