Commercial rent is typically calculated per square foot annually, then divided into monthly payments. **Basic formula**: Annual Rent = Square Footage × Rate per SF × Term (years).

Monthly Rent = Annual Rent ÷ 12.

Example: 5,000 SF office at $24/SF for 5 years.

Annual rent = 5,000 × $24 = $120,000.

Monthly rent = $120,000 ÷ 12 = **$10,000/month**. **Commercial lease types (2025 structures)**: (1) **Gross Lease (Full-Service)** - Tenant pays one rate, landlord covers all operating expenses (property tax, insurance, maintenance, utilities, CAM).

Rate includes all costs.

Example: $30/SF gross = tenant pays $30/SF only, landlord handles $8/SF in expenses, nets $22/SF.

Common in: Class A office buildings, medical offices, government leases.

Pros for tenant: Predictable costs, simple budgeting.

Cons: Higher rate per SF (landlord adds expense markup + risk premium). (2) **Modified Gross Lease** - Tenant pays base rent + some expenses (often utilities, janitorial), landlord covers property tax, insurance, structural maintenance.

Example: $22/SF base + $3/SF utilities = $25/SF effective rate.

Common in: Suburban offices, multi-tenant buildings.

Pros: Shared expense responsibility, moderate complexity.

Cons: Partial expense risk for tenant (utility increases). (3) **Triple Net Lease (NNN)** - Tenant pays base rent + ALL operating expenses separately: property tax, insurance, CAM (Common Area Maintenance).

Base rent lower, but total cost can exceed gross lease.

Example: $18/SF base rent + $4/SF taxes + $2/SF insurance + $3/SF CAM = **$27/SF total** (vs $30/SF gross).

Common in: Retail (national chains), industrial warehouses, single-tenant buildings.

Pros for landlord: Passes through all expense risk to tenant.

Pros for tenant: Lower base rent (if expenses controlled), direct expense visibility.

Cons for tenant: Expense volatility (tax assessments, insurance spikes, CAM overcharges). (4) **Absolute Net Lease (Bond Lease)** - Tenant responsible for EVERYTHING including roof, structure, parking lot.

Landlord receives rent check with zero responsibilities.

Example: $15/SF base + tenant covers $12/SF in all expenses = $27/SF.

Common in: Sale-leasebacks, credit tenants (Walgreens, CVS), build-to-suit properties.

Rare outside single-tenant retail/QSR. (5) **Percentage Lease** - Base rent + percentage of tenant gross sales (typically 5-10% above breakpoint).

Example: $20/SF base + 7% of sales over $500K/year.

If annual sales $800K → Base $100K + 7% × ($800K - $500K) = $100K + $21K = **$121K total** ($24.20/SF effective on 5,000 SF).

Common in: Shopping malls, retail centers, restaurants.

Landlord participates in tenant success but shares risk. **2025 market rates by property type**: Office (Class A urban): $35-60/SF gross or $25-40/SF NNN.

Office (suburban Class B): $20-30/SF gross or $15-22/SF NNN.

Retail (strip center): $18-35/SF NNN (varies by traffic).

Industrial/warehouse: $8-15/SF NNN (lower due to basic improvements).

Flex space (office/warehouse): $12-18/SF NNN.

Medical office: $28-45/SF gross (specialized HVAC, compliance costs). **Calculating true occupancy cost**: NNN lease $20/SF base + $6/SF expenses = $26/SF effective.

Add tenant improvements amortized: $50/SF TI ÷ 5 years = +$10/SF.

Add broker commission amortized: 6% × $26 × 5 years = $7.80 ÷ 5 = +$1.56/SF. **True occupancy cost = $37.56/SF** (vs $20/SF base advertised). **Expense escalations**: Most leases include annual escalators: Base rent escalation: 2-3% annually (CPI-linked or fixed).

Expense escalation (NNN): Actual pass-through of increases (property tax reassessments +5-10%, insurance +8-15% in 2024-2025).

Example year 1 to year 5: Year 1: $20/SF base + $6/SF expenses = $26/SF.

Year 5: $20 × 1.03^4 = $22.50 base + $6 × 1.08^4 = $8.16 expenses = **$30.66/SF** (+18% over term). **Common tenant pitfalls**: Signing NNN lease without expense cap (taxes spike 20%, tenant absorbs).

Not negotiating CAM audits (landlord overcharges $2-3/SF in some cases).

Ignoring gross-up provisions (small building, tenant pays CAM as if 100% occupied even at 60%).

Percentage lease without sales exclusions (counting online sales, catering, delivery in sales calculation). **Tenant negotiation strategies**: Gross lease in volatile markets (caps expense risk).

NNN lease with expense stops/caps (e.g., expenses capped at $7/SF, landlord absorbs overages).

TI allowance $40-80/SF for office (landlord funds build-out, amortized in rent).

Free rent periods (2-6 months) for long-term leases (10+ years).

CAM (Common Area Maintenance) charges are shared expenses in multi-tenant commercial properties covering common areas - lobbies, hallways, parking lots, landscaping, exterior lighting, snow removal, property management.

In NNN (triple net) leases, tenants pay their pro-rata share of CAM plus property taxes and insurance, added to base rent. **CAM components breakdown**: (1) **Operating CAM** (annual/recurring): Janitorial (common areas only, not tenant suite), Landscaping/grounds keeping, Parking lot maintenance/striping, Exterior lighting, Snow removal (seasonal), HVAC (common areas), Pest control, Security (if provided), Property management fee (typically 3-5% of rent). (2) **Structural CAM** (capital improvements amortized): Roof replacement ($12-18/SF amortized 15-20 years), Parking lot repaving ($4-8/SF amortized 10 years), HVAC replacement (common areas, amortized 12-15 years), Elevator modernization (amortized 20 years). (3) **Administrative CAM**: Management fees, Accounting/legal, Leasing commissions (sometimes passed through), CAM audit costs (if tenant requests). **Calculating pro-rata CAM share**: Tenant CAM Share = (Tenant Square Footage ÷ Total Building SF) × Total CAM Expenses.

Example: 5,000 SF tenant in 50,000 SF building, total CAM $150,000/year.

Tenant share = (5,000 ÷ 50,000) × $150,000 = **$15,000** ($3/SF CAM). **Total NNN calculation example**: 5,000 SF retail space in shopping center, 10-year lease.

Base rent: $20/SF × 5,000 = $100,000/year.

Property taxes: $6/SF × 5,000 = $30,000 (tenant share of building taxes).

Insurance: $1.50/SF × 5,000 = $7,500 (building insurance, tenant carries own contents insurance separately).

CAM: $4/SF × 5,000 = $20,000 (pro-rata share from above calculation). **Total annual cost = $100,000 + $30,000 + $7,500 + $20,000 = $157,500** ($31.50/SF effective rate vs $20/SF base).

Monthly NNN payment = Base ($100K ÷ 12 = $8,333) + Expenses ($57.5K ÷ 12 = $4,792) = **$13,125/month**.

Often paid as: $8,333 base rent + $4,792 estimated NNN (reconciled annually with true-up). **Gross-up provision warning**: If building is 60% occupied, landlord may "gross up" CAM to 100% occupancy equivalent, forcing fewer tenants to pay as if building were full.

Example: Actual CAM $120K for 60% occupied building (30K SF leased of 50K SF).

Grossed-up CAM = $120K ÷ 0.60 = $200K.

Tenant 5K SF share = (5K ÷ 50K) × $200K = $20K (**$4/SF** vs $2.40/SF if actual costs used). **This increases tenant cost by 67%** - negotiate gross-up caps or exclusions. **CAM reconciliation process** (annual true-up): Landlord provides annual CAM statement (typically 90-120 days after year-end).

Compares estimated CAM paid vs actual expenses.

If actual > estimated → Tenant owes balance.

If actual < estimated → Tenant receives credit/refund.

Example: Estimated $4/SF CAM paid monthly ($20K/year), Actual CAM $4.50/SF ($22.5K), Tenant owes $2,500 true-up. **CAM audit rights** (tenant protection): Most leases allow tenant CAM audit (at tenant expense unless errors >5% found).

Common findings: Duplicate charges (same expense in CAM and also billed separately), Capital items expensed immediately instead of amortized, Non-CAM items included (landlord suite improvements, leasing commissions above market), Management fees calculated on gross (including NNN) instead of base rent only.

Example savings: $4/SF CAM audited, find $0.80/SF in overcharges (20%), 5,000 SF × $0.80 = **$4,000/year savings** (audit cost $2,500, ROI 160%).

Negotiate annual audit rights, especially if CAM >$5/SF. **2025 CAM benchmarks by property type**: Office (Class A): $8-12/SF (high-end lobbies, security, concierge).

Office (Class B/suburban): $4-7/SF (basic maintenance, parking).

Retail (strip center): $3-6/SF (parking lot major component).

Retail (enclosed mall): $10-18/SF (HVAC, extensive common areas, marketing funds).

Industrial/warehouse: $1-3/SF (minimal common areas, mostly parking/landscaping). **Expense caps/stops (tenant protections)**: Base year stop: Year 1 expenses $6/SF, tenant pays $6/SF that year, then only increases above $6/SF in future years.

Example Year 5 expenses $8.50/SF → Tenant pays $6 (base) + $2.50 (increase) = $8.50/SF but protected from first $6.

Absolute expense cap: Expenses capped at $7/SF regardless of actual (landlord absorbs overages).

Example: Actual expenses $9/SF, tenant pays max $7/SF, landlord eats $2/SF.

CPI-linked escalator: Expenses increase max 3% annually or CPI (whichever lower).

Protects against tax spikes (property reassessed +20%, tenant only pays +3%). **Calculating NNN vs Gross lease comparison**: NNN lease: $18/SF base + $8/SF NNN = $26/SF total.

Gross lease: $28/SF (landlord covers all expenses). **Which is better?** NNN advantages if: Tenant can control expenses (warehouse - low CAM, efficient lighting/HVAC).

Expenses predictable (stable market, no major capital items due).

Tenant wants transparency (see exactly where money goes).

Gross advantages if: Expenses volatile (older building, frequent repairs).

Tenant wants simplicity (one payment, no reconciliations).

Small tenant (lacks resources to audit CAM, negotiate expense details). **Red flags in CAM charges**: Management fee >5% of rent (industry standard 3-5%).

Capital items not amortized (immediate expense of $500K roof replacement instead of 20-year amortization). "Reserve" charges without detail (landlord building slush fund, may never spend).

Leasing commissions in CAM (landlord business expense, should not pass through).

Marketing/advertising for retail (unless clearly defined and capped). **Negotiating CAM protections**: Annual CAM cap: Max 5% increase per year (vs uncapped exposure).

Audit rights with landlord-pays provision: If errors >3%, landlord pays audit cost.

Exclude capital items: No capital expenses in CAM (require separate approval or amortization).

Detailed CAM budget: Require line-item budget annually, right to object to specific expenses.

Gross-up prohibition: No gross-up if occupancy >70% (or exclude certain expenses from gross-up like management fees).

Understanding and negotiating CAM terms can save $1-3/SF annually on 5,000 SF space = $5,000-15,000/year over 10-year term = $50,000-150,000 total savings.