Foundations of Real Estate Management BOMA International ® Module 2: The Well-Versed Real Estate Manager Base Rent and Operating Expense Recoveries ®

Foundations of Real Estate Management Module 2: The Well-Versed Real Estate Manager 2 ® Objectives  Differentiate between gross, net, and hybrid operating expense recovery models  Describe steps associated with operating expense recovery process, including establishing base year, calculating and invoicing tenants for operating expenses, and resetting tenant’s prepayment of operating expenses

Foundations of Real Estate Management Module 2: The Well-Versed Real Estate Manager 3 ® Objectives  Describe the process associated with grossing up a tenant lease  Identify three major processes tenants use to control their operating expense pass through  Explain three primary methods for calculating base rent  Tell how operating expenses and base rent are treated differently in GSA leases compared to conventional leases

Foundations of Real Estate Management Module 2: The Well-Versed Real Estate Manager 4 ® Lease Components  Base rent component  Non-operating expenses  Debt service  Return on investment  Profit  Operating expense component  Pro-rata share of operating expenses

Foundations of Real Estate Management Module 2: The Well-Versed Real Estate Manager 5 ® Pro-Rata Share Tenant’s portion of the building = Tenant square feet Building square feet

Foundations of Real Estate Management Module 2: The Well-Versed Real Estate Manager 6 ® Types of Leases  Leases without expense recovery provisions  Gross leases  Pro-rata share over base year or base stop

Foundations of Real Estate Management Module 2: The Well-Versed Real Estate Manager 7 ® Types of Leases Net leases  Pro-rata share of certain expenses and (possibly) pro-rata share of increase over base year for other expenses  Triple net (NNN)

Foundations of Real Estate Management Module 2: The Well-Versed Real Estate Manager 8 ® Types of Leases Hybrid recovery leases  Modified Gross  AKA Industrial Gross or Modified Industrial Gross  Single net (N) or Double net (NN) For obvious reasons, do not use the term “net” when describing a lease

Foundations of Real Estate Management Module 2: The Well-Versed Real Estate Manager 9 ® It Doesn’t Matter  Regardless of lease type, if lease is structured correctly, payment to landlord will be the same  There are many ways to achieve same return to client

Foundations of Real Estate Management Module 2: The Well-Versed Real Estate Manager 10 ® Recovery Process v. Service Level  The three recovery methods (gross, net, or hybrid) relate to way operating expenses are treated  This has nothing to do with level of service landlord provides  Services required under lease are clearly listed in lease agreement

Foundations of Real Estate Management Module 2: The Well-Versed Real Estate Manager 11 ® Escalations & CAM Charges  Types of Recoveries  Common Area Maintenance (CAM)  Escalations/OE reconciliations  Calendar v. fiscal year recovery period  Impact on calculations  True-up methods  Lump sum  Monthly pre-payments  Gross-ups

Foundations of Real Estate Management Module 2: The Well-Versed Real Estate Manager 12 ® Operating Expense Adjustments  Exclusions  Caps  Percentage cap  Dollar cap  Cap on controllable expenses

Foundations of Real Estate Management Module 2: The Well-Versed Real Estate Manager 13 ® Calculating Base Rent Increases  Fixed amount over term  Flat rent over entire term (e.g. GSA)  Fixed increase amount  Percentage increase  Monetary increase

Foundations of Real Estate Management Module 2: The Well-Versed Real Estate Manager 14 ® Calculating Base Rent Increases Consumer Price Index (CPI) Example of a chart from the Bureau of Labor Statistics Website

Foundations of Real Estate Management Module 2: The Well-Versed Real Estate Manager 15 ® Miscellaneous Income  Submeter billings  Parking charges  Antennae/satellite charges  Storage

Foundations of Real Estate Management Module 2: The Well-Versed Real Estate Manager 16 ® GSA Leases v. Traditional Leases  Base rent flat  Paid in arrears  Operating expense increase based on CPI  Real estate taxes on a gross basis  Changes made on Supplemental Lease Agreements (SLA)