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Lease Comments

Leasing space is often a big expense for a small company. But it can be unnecessarily expensive if you don’t understand the hidden costs and restrictions that are buried in many leases.

The first thing to understand is that when you negotiate a lease, your landlord probably has the advantage. (Leases tend to be written more in favor of the Landlord than the Tenant.) If you’re like most tenants, you negotiate a lease once every five or ten years and you put rent into the same category as another routine, current business expenses, weighing the monthly payment versus your cash flow.

The landlord is in a different position. Its business is leasing space, and buildings are its major asset. The landlord is highly motivated to plan for the long-term and to write conservative leases that maximize the return on their assets. A good real estate lawyer can help protect your interests but often isn’t equipped to advise on business points.

Fortunately, if you’re savvy and reserve certain rights, you can turn a lease into a tremendous asset. Here are some of the more obscure lease provisions that protect landlords at their tenants’ expense.

The Space

Lease space is priced per “rentable” square foot Based upon BOMA Standards. (Building Owners and Managers Association International) (www.boma.com), vs. usable square feet. The difference called a “load factor. The load factor will include that particular space’s percentage of the common area within the property. Find more detailed information at the BOMA website.

In addition, landlords often develop their own methods for measuring rentable area. A landlord may measure from the outside of one exterior wall to another, for example, and include questionably “public” areas like air shafts. Some buildings seem to be measured from gargoyle to gargoyle—facade ornaments unrelated to a tenant’s usable space.

Operating Expenses/NNN—The Trickiest Clause

An operating expense or Triple Nets (NNN)) clause lets your landlord recover normal out-of-pocket costs of running a building. That should be all it does. Operating expenses listed in your bill should correspond directly to the percentage your square feet represent the gross square feet of the building, and they ought to meet an objective standard such as GAAP (generally accepted accounting principles), not conventions particular to your landlord.

Exclusions. Certain items should be specifically excluded from operating expenses: electricity that serves tenants’ spaces (the landlord recovers this from each tenant individually); executive salaries; consulting fees; market study fees; commissions and advertising costs; initial landscaping costs; structural repairs or replacements; penalties incurred because the landlord fails to pay taxes on time; fees and higher interest charges caused by the landlord’s refinancing of the property; money the landlord must pay if it defaults under a lease or other agreement; any legal fees to resolve disputes involving the landlord; any excessive amount the landlord pays a contractor or vendor because of a special relationship.

Capital Improvements. Capital expenditures require particular attention when you’re negotiating a lease. The operating expense clause should exclude them generally from the operating expenses for which you are billed.