Lease It and Love It
Most practices are in leased space, at least in Southern California. So, we should take a minute and review the main types of leases.
There are 3 main kinds of leases – Triple Net, Modified Gross, and Gross.
It is really important that you understand the differences.
TRIPLE NET LEASE
In a “Triple Net Lease” – ALL expenses of the property lease are passed through to the tenants - based on their percentage of occupancy. Sometimes, this is called the CAM charges – or common area maintenance charges.
That usually adds quite a bit of money to the lease. It can be close to a dollar per square foot, to a couple of dollars per square foot. So, a reasonably priced base rent is now not so reasonable.
I would always ask how much the CAM is at the time you are signing the lease. That amount is not guaranteed, but should give you an idea of how much it is, per square foot. And that’s what you want to know – the cost per square foot. CAM charges should reflect actual expenses of the center and are almost never “capped” to a certain amount.
In most leases, CAM expenses are dealt with differently depending on the type of expense. There are generally “ordinary expenses” and “capital expenses”
A capital improvement – meaning an improvement that will be capitalized by the owner – which means written off over a period of time depending on the useful life of the item – are usually collected from tenants over a period time as well – most commonly, 12 years.
But ordinary expenses - which is most of the expenses - are charged out in the year they are incurred.
As an example of a capitalized expense – if the building needs a new roof, and your portion of the roof is $12,000 – you would pay the landlord back a thousand dollars per year until your portion is paid off.
But for building janitorial, water, trash, management, pretty much everything else– those are ordinary expenses and you will pay those, according to your percentage of occupancy, on a monthly basis.
Most of the time, if the improvement comes in the last year or two of your occupancy, you can choose to move out rather than pay – but that isn’t a very practical option for a dentist.
Triple Net Leases – which are usually only shopping Center leases – are by far the most expensive lease you can enter into.
MODIFIED GROSS LEASE
Most professional building leases, and smaller shopping center leases are Modified Gross Leases.
This means that you will pay your portion of expenses based on the INCREASE of building expenses after the year you move in – The year you move is called your Base Year.
If expenses for the building were $100,000 the year you moved in, and they increase to $120,000 the next year, you would only be responsible for your portion –based on your percentage of occupancy - of $20,000 – that is, the INCREASE. If the lease was a Triple Net lease, you’d be responsible for your portion of the entire $120,000. You can see that modified gross leases are much less expensive.
This is by far the most common type of lease.
The last type of lease is a True Gross Lease. This means that you pay NO expenses except your agreed upon rent.
This is unusual, at least in popular areas, but certainly still seen in more out of the way areas, or less desirable buildings.