There’s rent. And, then there is “additional rent.” What is it and…why is it?
This is an important item to understand as many, if not most, industrial users and many office tenants in the Puget Sound area have a lease that includes additional rent. In short, additional rent is a share of building operating expenses. This type of rent is paid in addition to what is often referred to as “base rent”. It’s a way that landlords pass along the risk of fluctuating expense to tenants.
This model adds a layer of complexity in comparing the cost of various facilities. Asking rates are often quoted on base rates only. The additional rent must often be obtained separately. However, obtaining the current, projected and historic operating expenses from the landlord or landlord’s representation is only the first step in unpacking what the actual rental obligation will be over a term. Much more must be done than simply obtaining a copy of the building’s historic operating expenses to fully understand a tenant’s exposure to building expenses.
As tenant representation, the SRE team is can perform a review of expenses to determine how a particular building’s costs compare to similar properties in the market. This is an important step in understanding the true cost of building occupancy. If costs are reasonable compared to market costs and the ownership has historically consistent operating expenses, then the review may be done. However, often a building will have substantially higher expenses than the average. In this case, it’s best to investigate further.
The SRE team reviews a building’s expenses to determine if items included as additional rent, in which the tenant is responsible for, are typical according to industry standard. If items are out of the ordinary, then it may be worth pursuing further negotiation. An experienced real estate professional can justify to building ownership why an expense should be removed from additional rent. This “item inclusion review” is just one component of total review – which includes looking at the history of building costs as well as taking steps to limit exposure to exorbitant increases in the future.