Base rent is the number most commercial tenants focus on, and it is rarely the number that decides whether a space is affordable. Understanding what sits underneath it is the difference between a budget that holds and one that does not.
Commercial leases in Alberta are structured differently from residential ones. A residential tenant pays rent and usually utilities. A commercial tenant is typically responsible for a share of what it costs to run the building, and that share is charged on top of base rent. If you have only budgeted for the rate you were quoted, your actual monthly cost can come in significantly higher.
Here is how the structures work and what to check before signing.
Net lease versus gross lease
Almost every commercial lease falls somewhere between two structures.
Net lease
Under a net lease, sometimes called triple net or NNN, you pay base rent plus your proportionate share of the building’s operating costs. Those costs are billed separately and are usually referred to as additional rent. This is the most common structure for retail, industrial and multi-tenant commercial space in Alberta.
A quoted rate of eighteen dollars per square foot net is not your total cost. It is base rent only. Additional rent might add another eight to fourteen dollars per square foot on top, depending on the building.
Gross lease
Under a gross lease, one figure covers base rent and operating costs together. It is simpler to budget for and more common in office space than in retail or industrial. The trade-off is that the landlord builds an allowance for operating costs into the rate, and if actual costs come in below that allowance, you do not see the difference.
Neither structure is inherently better. What matters is knowing which one you are signing and what the total is.
What additional rent actually covers
Additional rent is your proportionate share of running the property. Your share is normally calculated as your rentable area divided by the total rentable area of the building. The components typically include:
- Property taxes. Usually the single largest component, and the one most likely to move year over year.
- Building insurance. Coverage on the structure, not on your business or contents, which you insure separately.
- Common area maintenance. Snow removal, landscaping, parking lot upkeep, exterior lighting, waste removal and repairs to shared areas.
- Utilities for common areas. Lighting and heating for shared corridors, entrances and exterior areas.
- Management fee. A percentage covering administration of the property.
What is not usually included is anything metered to your unit directly. Your own heat, power, water and internet are typically billed to you separately and are not part of additional rent at all. That is a third cost layer some tenants forget entirely.
The line items that catch people out
Three things account for most of the surprises in year two.
Estimates versus reconciliation
Additional rent is usually charged monthly as an estimate based on the prior year, then reconciled after year end against what was actually spent. If actual costs exceeded the estimate, you receive a bill for the difference. If they came in lower, you receive a credit.
That reconciliation invoice is the single most common unpleasant surprise in commercial leasing. Ask what the reconciliation looked like for the last two years before you sign. A landlord who runs the building properly will have the numbers.
Property tax reassessment
Property taxes are reassessed periodically. If the assessed value of the building rises, your share rises with it, regardless of whether anything about your space changed. This is normally passed through in full and is not something either party controls.
Capital versus operating
This is worth reading your lease carefully for. Operating costs are the ongoing expenses of running the building. Capital costs are major replacements, a roof or a parking lot resurfacing. Some leases allow capital expenditures to be amortised and charged back to tenants through additional rent. Others exclude them. The difference can be substantial, and it is negotiable.
Questions worth asking before you sign
- Is this a net or gross lease, and what is the current additional rent per square foot?
- What were the actual additional rent figures for each of the last two years?
- Which utilities are metered directly to my unit and billed separately?
- How is my proportionate share calculated, and what is the total rentable area used?
- Can capital expenditures be charged back through additional rent, and is there a cap?
- When does reconciliation happen, and how much notice do I get of a shortfall?
This article describes how commercial leases are commonly structured in Alberta. It is general information, not legal or financial advice, and every lease is different. Have a lawyer review any commercial lease before you sign it.
The practical takeaway
When you compare two spaces, compare the total occupancy cost, not the quoted rate. A space at sixteen dollars net with fourteen dollars of additional rent is more expensive than one at twenty dollars net with eight. The headline number tells you very little on its own.
Ask for the additional rent figure in writing at the same time you ask for the rate. Any landlord who owns and operates the building will have it to hand.
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