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Five Things for a Tenant to Consider in Commercial Real Estate: Cost


By James Flick, Director of Research

Part 2 of a 5 Part Series

Signing a lease agreementThere is any number of reasons that a tenant decides to explore leasing or buying a new space for their company. Perhaps they need to expand their footprint, are looking to upgrade from a Class B to a Class A building, have a pending lease expiration or simply looking to get a more cost effective deal. No matter the reasoning, before they sign their new lease there are a number of things that the tenant needs to consider.

2) When leasing a space there is more to consider than just what the rate of the lease is. A tenant needs to protect themselves by being educated about these considerations in order to ensure that the amount that they are paying is fair market value.  Other considerations beyond lease rate include rent abatements, operating expenses and tenant improvement dollars. Below is more information about all four things.

  • Lease Rates are often advertised as either net, modified gross, gross or full service gross rates. These are very different.

    • Net lease rates require that a tenant pay property expenses in addition to the rental rate. The most common type of net rate is Triple Net Lease Rates (NNN) where in the tenant pays rent and all other real estate costs (insurance, taxes, repairs, utilities, maintenance, etc.).

    • Modified Gross lease rates require the tenant to pay rent plus utilities, cleaning and interior maintenance.

    • Gross lease rates are where tenant pays operating expenses above a base year.

    • Full Service Gross lease rates give the responsibility of paying the taxes, insurance and maintenance to the landlord. Therefore the rental rate that a tenant sees is the rental rate that they pay.

  • Rent Abatements are months of free rent that the landlord concedes to a tenant. Typically the longer the lease term the more free rent a landlord is willing to grant.

  • Operating Expenses are the costs associated with maintaining a property. These are the sum of the additional costs that a tenant may be responsible for. This cost must be examined so that the tenant does not pay more than their rightful share. For example, based on the type of lease rate, what is included in operating expenses may differ. The definition of operating expenses under a triple net lease differs from that of a modified gross lease. See the definitions above.

  • Tenant Improvement (TI) dollars are a sum of money that is negotiated between a landlord and tenant to be spent on the improvement of a space. This could be replacing carpets, new windows, painting walls, etc. The TI allowance is paid by the landlord. If expenses for improvements go beyond the negotiated sum the tenant is responsible for payment of the excess.

Are you thinking about all the right things?


James Flick Director of Research Cassidy Turley Cincinnati DaytonJames Flick joined Cassidy Turley in 2010. As Director of Research, he is responsible for overseeing the Research Department in our Cincinnati and Dayton offices. He produces studies and statistics on topics affecting the regional economy as well as the local office, industrial, retail and multi-family markets.

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