By James A. Schnur, CCIM
President and Designated Managing Broker
Integrated Real Estate Solutions
The rental rate for a commercial or industrial space typically includes more than the base cost of rent and the company’s share of the utilities. Often, this concept catches business owners off-guard, especially when they have worked hard to prepare a budget for a new space ahead of time without considering what other expenses play a factor in their lease.
Understanding the typical expenses that go along with renting a commercial or industrial space helps business owners understand exactly where their money is being allocated within a lease. It also helps business owners prepare for their future as tenants in a particular building, as some of these expenses can fluctuate year-to-year during the lease term, so preparing ahead of time accounts for these changes.
The Other Expenses in Commercial and Industrial Rents
The most common set of expenses tenants will see in addition to their typical monthly rent considerations are building operating expenses (also called op/ex). These expenses are costs associated with owning and maintaining the building, passed on to tenants by the landlord. These expenses are comprised of a number of items that help keep the building functioning and in good repair:
- Property Taxes
- Property Insurance
- Management & Administrative Fees
- Common Area Maintenance (CAM) Fees
The last item — Common Area Maintenance (CAM) Fees — covers a broad area of costs associated with the upkeep and maintenance of building common areas, including outdoor landscaping, parking lots, building security, common area lighting, and other similar expenses.
The Difference in Industrial Space and Other Commercial Space Expenses
One major difference between tenants in industrial spaces versus those in other commercial spaces is whether electrical and janitorial costs — typically referred to as E&J Costs — are included in the CAM expenses within a tenant’s lease.
Tenants leasing industrial spaces are typically metered by the electrical company individually, whereas some tenants in other commercial spaces typically pay a proportional share of the building’s electrical fees relative to the size of the space leased. This difference is because of the drastically different uses tenants have for industrial spaces — one tenant using the space as a mass cold-storage facility requiring 24/7 electricity to power refrigeration will use significantly more power than a neighboring tenant using their space as a standard distribution hub.
Similarly, industrial tenants typically must sub-contract for their own janitorial services. This is because industrial spaces do not share the same types of common areas that most commercial office spaces maintain, such as lobbies. However, these types of common areas — along with outdoor landscaping — are key components of commercial office spaces, and require regular maintenance and upkeep to remain functional and inviting.
How Operating Expenses Factor into Rental Rates
Tenants in both industrial and commercial spaces generally pay their share of the building’s total operating expenses based on the size of the space the tenant is occupying. This means that in a multi-tenant property, each tenant will share responsibility for the building’s op/ex based relative to the amount of space each tenant is using within the building. However, in a property with only one tenant, that tenant is responsible for the full op/ex for the building.
The way a tenant’s lease is structured will change how they see building operating expenses included in their lease terms. Tenants with a triple net (NNN) lease will see operating expenses added as a monthly charge in addition to their rental rate. These bills will be provided each month by the landlord, and are due in addition to the monthly rent for the space.
With a gross full-service lease, tenants will have the building op/ex folded into the gross rental rate. Because of this, the lease often will stipulate an operating expense stop — this is the estimated maximum dollar amount that the landlord will use from the full-service rental rate to apply to building operating expenses for that first year.
At the end of the year, in both lease structures, the landlord will calculate the actual expenses used on operating expenses, and reconcile the cost with tenants via a reconciliation and estimate statement, detailing the costs of operations for the previous year and an estimation for the next year. If the operating expenses ended up being higher than anticipated, this statement will include a bill for the overages during the previous year. If the operating expenses ended up being lower than anticipated, the statement would include a credit toward operating expenses for the next year’s expenses.
Like many other areas within commercial and industrial leases, building operating expenses can be a difficult subject to navigate, but are still an important consideration when scoping out new properties and a detail that should be kept in mind before approaching the negotiation table. To ensure that any new lease includes the best possible terms for your business, and to make sure every detail is covered in-depth, consider partnering with a commercial property tenant representative that will have your business’s best interests in mind at all times during the property search and lease negotiation.
A commercial property tenant representative, such as Integrated Real Estate Solutions, Inc., works on behalf of your business to ensure your business has the best lease term available to continue operating at the level of growth and progress you have set out to achieve. While understanding all the complexities of a property search and lease agreement can be difficult, understanding that your business has a partner in IRES to guide you through the process will make the terms easier to parse and the process easier to accomplish, with the best possible outcome for your continued business success.
Integrated Real Estate Solutions, Inc. provides clients with the in-depth knowledge and experience that is critical to determine the right path to your next move, lease renewal, or strategic repositioning of your real estate portfolio. Contact us or call 847.550.0160 today about your needs, and put our success to work for you.