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Most commercial leases have annually stepped-up base rental amounts over the term of the obligation.  The monthly rent is a combination of the "base" rent (dollar amount per rentable square foot per year - $/RSF/Yr) and the operating expenses, commonly referred to as the triple nets (aka "NNN's").  These "nets" are referring to the quoted rental amount (base rent number) being "net" of taxes, insurance and/or common area maintenance expenses, which are re-calculated and estimated for the next year on an annual basis.  These varying methods of calculating the total rent could fill dozens of blog entries so we will not go into them now.... (but contact me if you need more info)

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Although there are several ways for the Landlord to calculate and collect their total rental amount, typically business owners will see an annual increase in the base amount dictated by the lease language.  ESG Realty Advisors deals with various landlord-specified rental calculations for our clients but something "new" has surfaced with two back-to-back deals we have completed that may be just a coincidence, or a sign of the times.

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"Normally," a multi-year lease obligation will have annual increases set as either a dollar amount over the previous year, or a percentage increase amount over the previous year.  The average we see is somewhere around a 3% increase or a flat $.50/RSF/Yr increase in the base rental rate, plus all pass-through increases in the operating expenses (the NNN's). This "new" method sets the annual increase based on the Consumer Price Index (CPI) change from year to year.  Depending on how the national economy does, you could be paying much more than the typical $.50 or 3% in future years.  Is it fair?  Can you budget for it?  Can it be negotiated out of a deal?  Every situation is different.  

With the changing economy, we all have to adapt to survive.  Landlords are no different.  They are well-aware that we are still in a Tenant's Market and they will do everything they can to attract and keep Tenants in their buildings.  With low rental rates and incentives, Landlords balance what is best for their short term as well as the long term.  It stands to reason that if the economy does not improve, having a rent increase based on the CPI is a benefit to the Tenant who will not have a significantly higher increase when the business may not afford it.  Take this last year, for example - the “CPI Index for All Urban Consumers, U.S. City Average, All Items” was only 1.1%.  On the other hand, if the economy does improve (as we all hope), the Landlord will be collecting more base rent to make up for having to attract Tenants with lower rents in the past.  Fair trade-off?  It depends on how you look at it.  Each business needs to make that decision based on their own situation.  

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Make sure you understand all the facts BEFORE you sign on the dotted line.  Create leverage by investigating multiple options for like-properties in the area to see if you can get a better deal (not just lower rental rate).  Be aware of the various methods of calculating your monthly rental amount and how outside factors can affect that monthly total.  Learn the differences between a triple-net lease, a full-service lease, modified gross, percentage rent and the other widely-used methods of calculating rent.  Arm yourself with competent representation and most importantly, have a real estate attorney review the lease before you sign.  A commercial lease is a long-term commitment - make sure it is the right move for you now and in the future.