Commercial Real Estate Leasing Terms and What They All Mean

If you’ve done a search for commercial real estate listings in Edmonton lately, you might have been surprised (or angered!) by how the various listing services and websites quote lease rates.  Here are a few examples of how different the terminology can be:

Loopnet, which is owned by Costar, tends to report lease rates as a NNN amount plus another amount for TMI.

Catylist, which our website’s listing search runs on, quotes a lease rate for NNN plus another rate for operating costs.

Some other websites quote rates as net rents, gross rents and additional rent, CAM and taxes.

We even found a listing on Realtor.ca that only had a single rate, and there was no description if it was a net rate or gross rate.

It’s no surprise that tenants are confused.

We’ll cut through the jargon and help you get a better understanding of how all these terms and rates ultimately get translated into the rent you’ll pay on a lease.  Generally speaking, for a commercial lease you will pay a pre-determined amount of rent to the landlord, which is often called net rent.  Sometimes it can be called triple net rent, or NNN.  In addition to the net rent, tenant’s typically pay a proportionate share of the operating costs of a building.  This includes property taxes, building insurance, common area maintenance (ie/ landscaping and snow removal) and management fees.  Utilities may or may not be included in this amount so it’s best to clarify early.  The amount of rent that gets paid as operating costs might be called additional rent or TMI (taxes, maintenance and insurance).

Occasionally you might see a gross lease (which implictly assumes the net rent and operating costs will be combined), but even this may be misleading and there will likely be a provision that any increase in the operating costs gets passed through to the tenants on a proportionate basis.  We previously wrote an article describing the difference between gross rent, net rent an net effective rent.

Unfortunately for tenants, it’s often not as simple as looking at a listing online and figuring out how one space would compare against another.  Instead, it’s incumbent on a tenant to get as much information as possible about how the rent is being calculated and what is included.  One space that has a low rent might be offset by a higher operating cost compared to other properties.  One landlord might collect rent on a mezzanine space, while another landlord charges a higher face rate but includes the mezzanine for no additional charge.

Once these numbers have been flushed out, the rent can be calculated by multiplying the size of the space by both the net rent (or NNN) and the operating costs (or additional rent or TMI).  For example, a 5,000 square foot space with a net rent of $10.00 per square foot and an operating cost of $5.00 per square foot would be calculated as follows:

5,000 square feet * $10.00 / square foot = $50,000 (this is the annual net rent)
5,000 square feet * $5.00 / square foot = $25,000 (this is the estimated operating costs).

Total rent would therefore be $75,000 / year or $6,250 / month.  Keep in mind that the operating costs are an estimate, and are subject to change as the actual costs roll in.

In order to accurately compare spaces, it’s essential to know the definitions and what is included.  To compare apples to apples, you first need to compare TMI to CAM and taxes.

 


 

Disclaimer

This is not intended to be construed as legal or accounting advice and does not form part of any future contract. Information and definitions contained herein reflect our sole opinions and are subject to change without notice. Readers should independently verify and research the terminology before acting on anything contained herein and the content may also not be accurate in other markets. We strongly recommend and encourage readers to obtain independent legal and accounting advice.

Leave a Reply

Your email address will not be published. Required fields are marked *