By Rick Grossmann
Recently, I have had several clients ask for some real estate tips and strategies, so I joined forces with my Franchise Bible co-author, Michael Katz, to develop a series of helpful articles. Katz is a franchise, business and real estate attorney and has been working with landlords and tenants for over three decades. This article covers the basics of square footage and triple net.
If you want to open a brick-and-mortar location, negotiating a real estate lease will be an integral part of your startup checklist. Like so many contracts, there are no “form” or “standard” leases, and a landlord can fashion any contract that it wishes. All of the leases, however, contain legal terms that are incomprehensible to the entrepreneur. The definition of a square foot is just one such term.
A square foot
Easy, right? A square foot (often shortened to “sf”) is a unit of measurement that describes a square that is 12 inches on each of its four sides. So, when is a square foot not a square foot? When it is a “Rentable Square Foot” or a “Usable Square Foot”. The Building Owners and Managers Association International (BOMA) is a recognized leader in all things having to do with building measurements and provides us with insight. Thus, a tenant’s Usable Square Footage is the actual amount of square footage of the premises leased. In turn, this is measured from wall to wall and includes closets, bathrooms located exclusively within the space, columns and other support structures (even though you cannot use such square footage), storage space and the like.
The Rentable Square Footage of the tenant’s premises is defined as the Usable Square Footage plus a portion of the common area. That portion of the common area associated with the premises is calculated by multiplying such Usable Square Footage by a fraction the numerator of which is the usable square footage of the premises and the denominator of which is the total usable square footage of all of the spaces available for lease. For instance, if the usable square footage of the common area is 300 sf (consisting of, for instance, a common hallway and waiting area) while the tenant’s premises is 300 sf and the total project is 1,200 sf of Usable Square Footage, the tenant’s obligation is determined by the following calculation: Tenant’s proportionate share of the common area = 300 x 300/1200 or 75 sf. That means that the tenant’s Rentable Square Footage (sometimes identified as “rsf”) will be 375. Thus, the commercial lease may require the tenant to pay rent on 375 sf instead of just 300 sf.
‘Triple net’ or ‘NNN’ leases
While some landlords use the Rentable Square Foot method as the measurement of choice for calculating the tenant’s rent, other leases use the Usable Square Footage of the space as the basis for calculating the “base rent” and then assess “additional rent” based upon the landlord’s costs to operate the entire project. These costs are often segregated into 3 categories (the “Triple” in Triple Net and the identity of each “N” in NNN):
- Taxes assessed on the entire project
- Insurance purchased by the landlord to protect the entire project (exclusive, however, of the interior spaces of each space, which is separately insured by each tenant)
- Expenses to maintain the entire project (usually called out as “common area maintenance” or “CAM” expense).
A tenant’s share of the NNN costs, expressed as a percentage, is determined using the same formula as was used to figure out the Tenant’s Rentable Square Footage. Using the example from the previous paragraph: The tenant’s proportionate share of all of the NNN costs = 300/1200 or 25 percent; then, if the landlord’s yearly real estate taxes are $500, if insurance premiums are $250 per year and if the yearly cost to maintain the common area is $400, the tenant’s additional rent will be: 25 percent x ($500 + $250 + 400) or $287.50 which figure is added to the base rent.