True Net: A true net lease is sometimes used in single user buildings where
base rent is structured lower assuming the tenant will pay all taxes, insurance premiums and maintenance, repair and replacement costs associated with the building and property. If this method is used, the "absolute net" concept should be
Triple Net: More commonly, the tenant will be required to pay its pro rata
share of taxes, insurance and common area maintenance/ operating expenses incurred by landlord with respect to the premises, building and property.
Base Year/Expense Stop: Often in the office lease market, initial base rents are deemed to include taxes, insurance, CAM and other operating expenses for the initial or first full calendar year of the term. In order for a landlord to protect itself from bearing all risk of increased costs, these leases often provide for the tenant to pay its share of such charges in excess of the charges incurred during a certain base year. The base year, from a landlord's standpoint, should be the year the lease is executed or the first full calendar year of the Term. As an alternative, the lease may provide for an "expense stop," which is a sum certain per square foot (i.e., $5.00 per square foot) with the tenant paying its share of all expenses in excess of such amount with respect to its premises.
Tenant's Percentage or Pro Rata Share: Tenant's share of operating expense pass-
throughs is usually a percentage equal to the fraction of:
Tenant's Rentable Area (sq. ft.) Total Building/Project Square Feet
However, often certain operating expenses for multi-use properties are beneficial to less than all tenants (i.e., janitorial services in an office/retail tower may be provided to office but not retail tenants). Thus, it is advantageous in certain projects to include a clause allowing landlord to equitably adjust the tenant's percentage of any particular item of expense to create a pro rata reimbursement among tenants benefiting from such expense. This "equitable adjustment" should be an option as opposed to mandatory obligation of the landlord. (See Form 13.)
Definition of Operating Expenses: It is essential to properly define the costs and
expenses which will be subject to reimbursement by tenants of a project. Some leases separately deal with taxes, insurance and common area maintenance (CAM) charges. We
prefer to use the broad concept of "operating expenses" which includes taxes, insurance and CAM charge as well as other costs incurred by landlord in connection with the "ownership, maintenance, and operation of the project." This general definition should be supplemented
by a non-inclusive list of examples of items which will be included in operating expenses. (See Form 14.)