The Basics of Commercial Leases
When comparing office spaces, it’s easy to focus on Base Rent, but that number rarely tells the full story. Understand what you’re really paying for in a commercial lease, so you can budget confidently and avoid surprises.
Operating Expenses and CAM Charges
When you lease office space, you’re paying for more than just the square footage you occupy. You also share the costs of keeping the building operational and well-maintained. These additional costs are called operating expenses and include things like property taxes, building insurance, maintenance, repairs, utilities, and property management fees.
A key component of operating expenses is Common Area Maintenance (CAM): costs specifically tied to maintaining shared spaces in and around the building. CAM typically covers services like landscaping, snow and ice removal, elevator upkeep, lighting and cleaning of hallways, lobbies, restrooms, parking lots, and sometimes security. These costs can significantly add to your total rent, so it’s important to know how CAM is handled in your lease.
In many leases, tenants pay monthly estimates of their share of CAM and other operating expenses, followed by an annual reconciliation. At the end of each year, the landlord compares the actual expenses to what was estimated. If actual costs were higher, tenants pay the difference; if they were lower, tenants may receive a refund or credit. This process ensures everyone pays their fair share of the building’s real costs.
Before signing a lease, ask for the current CAM rates, usually quoted per square foot, and find out how increases are handled. Some leases include caps on controllable expenses: costs the landlord can manage, such as janitorial or landscaping. Other costs, like property taxes or utility rates, are considered uncontrollable since they’re set by external factors.
Property Taxes and Insurance
In addition to CAM, tenants usually pay their proportional share of property taxes and building insurance. Property taxes are assessed by local governments based on the building’s value, while insurance protects the building against risks like fire or storm damage. These costs, like CAM, are allocated among tenants based on the square footage they lease. For example, if you lease 2,500 square feet in a 10,000-square-foot building, you’ll be responsible for 25% of the building’s property taxes and insurance.
Types of Leases
Once you understand that rent is only part of the cost, the next step is knowing how your lease is structured because the type of lease determines exactly what you’re responsible for. Commercial leases typically fall into three categories: Gross, Modified Gross, and Triple Net (NNN), each with its own way of dividing costs between you and the landlord.
In a Gross Lease, you pay one all-inclusive monthly rent, and the landlord covers most or all operating expenses such as property taxes, insurance, maintenance, and utilities. This type of lease is simple to understand and makes budgeting easy, but the Base Rent tends to be much higher because it already accounts for those costs.
A Modified Gross Lease is a hybrid approach. You pay a fixed Base Rent that covers most building expenses, but you also pay directly for certain costs, such as utilities or janitorial services. This gives tenants more visibility into specific charges while keeping rent relatively predictable.
A Triple Net Lease (NNN) separates base rent from operating costs. Tenants pay a lower base rent, plus their proportional share of property taxes, insurance, and common area maintenance (CAM). This structure offers more transparency about how building expenses are allocated but also places more risk on the tenant if those costs rise.
Each lease type has pros and cons. Gross leases are simple but less flexible. Triple Net leases give you a clearer picture of where your money goes and more control over expenses, but you’ll need to stay on top of cost fluctuations. Always clarify what type of lease is being offered and what costs you’re responsible for (this is typically outlined in the sections of the lease titled Base Rent and Additional Rent).
Understanding your lease structure, and the additional costs that come with it, helps you plan your budget more accurately and avoid surprises later. A base rent figure may look appealing at first glance, but if you overlook the operating expenses, your actual monthly cost could end up much higher than expected. By asking the right questions about CAM, operating expenses, and how those costs are calculated, you’ll gain the clarity you need to budget effectively and choose the right space for your business with confidence.
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