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 The monthly rent that the tenant is obligated to pay generally has two significant components: "fixed" or "base" rent (used interchangeably here), and "additional" rent. Both components are directly related to the amount of square footage contained in the space (See: The Space: Size and Condition) and are often stated as a "per square foot" amount. Just as it is important to see how the space is measured in order to understand the basis behind the number that represents the square footage in the premises, it is important to "unbundle" the various charges that are included in the monthly (fixed as well as additional) rental payments to understand what the tenant is actually agreeing to pay for. Ideally, the landlord should be able to recoup its cost of operating and maintaining its building and to make a reasonable profit, and the tenant should pay its fair share of the cost. (This does not apply in the case of ground leases or triple net leases, where the tenant takes most or all of the space and pays a relatively small monthly rental, but takes over the greater part of landlord's operating expenses.) (See: Special Considerations for Large Spaces) The tenant needs to understand the methods of calculating all of the various components of rent, to be certain that none have the effect of skewing the tenant's monthly rent payment in a way that is inequitable. Generally, base rent is expressed as a "per square foot" amount and may or may not increase each year. Charges for real estate taxes, electricity and "Porter's Wage" (an index often used to calculate increases in base rents), referred to as "operating expenses," are paid in addition to the base rent. The concept underlying the calculation of such additional charges is to enable the landlord to collect tenant's proportionate share, most often based on its square footage number (See: The Space: Size and Condition) of any increases in these operating expenses compared to a "base year," which is arbitrarily selected (usually the first year that the tenant is occupying the premises). Another way that landlords structure a lease to recover their operating expenses is to create a detailed list of these operating expenses and include it as a part of the lease (or to state in the lease that the tenant is responsible for "all expenses," with specifically enumerated exclusions), thereby making the tenant responsible for them. Clearly, the tenant and the relevant members of tenant's project team need to understand the ins and outs of operating a large office building, since the monetary implications of such a clause can be staggering, sometimes exceeding the base rent. (See: Other Consultants for Tenant) Charges for electricity (and water) may be included as a part of the base rent ("rent inclusion basis") or billed separately and calculated with reference to the use of meters. Often, landlords base their increases in electricity charges on use surveys, performed by the landlord's surveyor. Sometimes, depending on the deal, such survey-based increases can be challenged. Like virtually all lease provisions, this is subject to negotiation. Understanding the methodologies underlying the calculation of rentals and the escalations of those rentals is crucial to conducting the most effective negotiation of rental payments for the tenant.  |
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