In the Spotlight: Dealing with Vacancies in the Context of Pass-Throughs

The familiar designations given to commercial leases, such as 'triple net,' 'full service,' and 'industrial gross' are, in fact, descriptive of the extent to which operating expenses and real estate taxes are passed through to the tenants. Thus, 'triple net' describes a lease where the base rent is 'net' to the landlord (i.e., after all expenses), with the tenants also paying for all operating expenses (except, perhaps, structural and roof), real estate taxes, and insurance premiums ' thus the 'triple' in triple net. A 'full service' lease, on the other hand, includes as a component of the base rent the operating expenses and real estate taxes at the level they are at lease commencement or during the first year or so of the lease term. It requires, however, that the tenant pay in subsequent years all increases in operating expenses and real estate taxes over that 'base' amount. The base amount is referred to as the 'expense stop,' if expressed as a dollar amount, and as a 'base year amount,' if tied to actual expenses in a calendar year not completed at the time of lease execution. The hybrid lease is the 'industrial gross' lease, which has the tenants paying all of the operating expenses, but only increases over the expense stop/base year amount in the case of real estate taxes and insurance premiums.

In each of these types of leases it will be seen that the basis upon which the passed-through operating expenses and taxes are allocated among the tenants is quite important, especially when portions of the building are not under lease. In most leases, the allocation is based upon the proportion which the particular tenant's rentable square feet ('rsf') under lease bears to the total rentable square feet of the building. Thus, the proportionate share of a tenant leasing 10,000 rentable square feet in a building having in total 100,000 rsf would be 10%.