§ 19.02 Base Rent

• Jurisdiction: United States
• Publication year: 2022

§ 19.02 Base Rent

Base rent is rarely what it seems to be. The party entering into an office lease must know exactly what base rent is made up of, what factors will change it during the lease term, how it will change and what the base rent will actually be purchasing for the tenant under its lease. Ideally, the base rent is a calculation by the landlord of the common costs per rentable square foot of keeping the building up and running.

In the late 1970s, tenants only paid base rent (under the terms of what was called a "full-service gross lease"). From that rent, the landlord was responsible to pay for: (1) all of the building's operating expenses, including utilities, repairs and maintenance, property management, etc., (2) insurance premiums and deductibles, (3) gross receipts, property and other ad valorem taxes, (4) any and all capital expenditures, (5) the landlord's own operational and business expenses, (6) marketing, advertising and leasing expenses and commissions, and (7) its debt service. After all of those costs were paid, the amount remaining, if any, was the landlord's operating profit. It was commonly understood that tenants were not in the real estate business and therefore it was the sole responsibility of landlords to absorb all the risks of ownership. However, over the next four decades, this notion has gradually eroded and more and more of the burden of these risks has been transferred to tenants. Tenants need to become better acquainted with these risks and understand the changes that have occurred when evaluating the merits of the "lease versus buy" decision.

The evolution of the sharing and/or transfer of risk from landlords to tenants in most commercial leases today is apparent in the following areas: (1) operating expenses and taxes, (2) capital expenditures, (3) insurance coverage, and (4) changes to accounting reporting. Each is discussed in turn below. (Please note landlords continue to share in at least some of these risks of ownership if the building or project is less than 100% leased, since they do not have a tenant to absorb that share of the risk associated with the vacant space.)

[1]—Price Per Square Foot

[a]—Rentable vs. Usable Square Feet

When a dollar figure per square foot for base rent¹ or fixed rent in an office space is quoted to a prospective tenant, that number alone is not the definitive answer to the question of how much that space will cost the tenant to rent. In fact, the per square foot number raises more questions than it answers. The dollar figure quoted is generally for rentable space. This does not necessarily mean, however, that the tenant will be able to actually use all the square feet it rents.²

What is a rentable square foot and what percentage of the total rentable square feet can the tenant actually use or receive a benefit from? When these questions are answered, the dollar figure per square foot for the space that is usable or from which the tenant can legitimately benefit may be considerably higher. For all practical purposes, however, this is the real price when comparing one space to another. Since rentable square footage includes a share of nonusable space such as common areas, internal columns and elevators, the tenant will want to figure out the actual, usable space to determine whether the premises will be large enough to meet its needs...