There are two components to your rent: i) base rent, or net rent, which is the money your landlord actually receives, and ii) operating expenses, or “opex,” which are your share of the building’s operating costs (taxes, utilities, landscaping, janitorial, repairs and maintenance, etc).
Depending on your property type and/or market, your lease could structure these components any number of ways. The most common are as follows:
• Full Service Gross: Tenant pays stated gross rent every month, say $25psf, and the landlord will be responsible for base year operating expenses (more on base year opex below). So, of that $25, the landlord might keep $15 in net rent and have opex of $10, but the tenant needn’t know the breakout until after the base year (see below).
• Full Service Gross + Tenant Electric: same as gross lease, except Tenant pays stated rent plus their own electric (which is usually separately metered or sub-metered).
• Net Lease: Tenant pays base rent plus their proportionate share of operating expenses. In practice, the tenant will pay an estimated monthly operating expense to the landlord, and then reconcile any difference from actuals at the end of the year.
What no one tells you: From your landlord’s perspective, all dollars are not created equal. Most landlords try to keep rent as high as possible to increase sale value and/or leverage. As such, landlords are more willing to give larger TI allowances or free rent, but will fight to the death over the rental rate.
A NOTE ON BASE YEAR OPEX
Need to know: In a Full Service Gross lease, tenants are typically charged for operating expenses above their “base year” operating expenses. The “base year” is typically the first year of the lease term or the first full calendar year of the lease term (using a calendar year helps the landlord do all tenant base years off the same time period). By way of example, if operating expenses in the first year of a lease are $10, that will be the maximum amount of expenses the landlord will pay each year for the remainder of the lease. So, if in the second year of the lease, opex is $11, the tenant will be responsible for their $25 face rent PLUS $1 for expenses above the base year. You should make sure that your lease provides for these expenses to be competitively bid in good faith by the landlord where possible (taxes are not possible, janitorial service is).
What no one tells you: Landlords will play games in your first year to push your base year expenses as low as possible so they can maximize the rent they get (the net rent) and push through more expenses later in your lease. For example, instead of the $10 noted above, they could delay making some payments to vendors until the following year. Thus, opex could go down to $9 for the base year instead of $10, and the second year when it goes up to $11, your rent goes up $2 instead of $1. So, be sure to ask for the right to audit your base year for the first three years of your lease. Make sure expenses in the first year of lease are not “low balled”. The property management division of your brokerage firm can help with this. Ask your broker to include this service as part of their commission. All the Fortune 500 companies know this.