Triple Net Leases- The Impact of Building Expenses on Commercial Rents
by Darnell Dunn, Director of Business Recruitment, Worcester Regional Chamber of Commerce
“Small businesses in the city are hurting and a competitive commercial tax rate will attract new businesses while helping the existing ones. I believe it shows we’re working to help our small businesses and bring new folks in if we can just try to start shrinking the gap a little bit,” said Worcester City Councilor Jenny Pacillo as she prepared to cast a vote on tax classification for fiscal year 2025.
More than 80% of chamber members are small business owners with 10 employees or less. Commercial property tax policy impacts not only where businesses are located and where individuals choose to live and work, it also factors into their future choices.
Few businesses influence the quality of life more directly than supermarkets. While Worcester’s population is growing, the number of locations where fresh fruits, vegetables, and other perishables and nonperishables can be purchased is shrinking.
In the last four months, two supermarkets, Price Chopper, and Stop and Shop, have closed their locations in Webster Square and Lincoln Plaza respectively.
Members of the chamber staff were able to connect ownership of the former Price Chopper location with a regional, family-owned grocery store mulling an expansion in Worcester. The key consideration for the grocer involves weighing the size of the opportunity to grow their footprint in the market against the cost of occupancy.
Occupancy costs vary by tenant, lease, and property type but almost exclusively include some combination of base rent, property taxes, insurance, utilities, common area maintenance, and tenant improvements. Base Rent or the amount of rent that goes directly to the property owner, usually expressed on a per-square-foot basis, is charged in exchange for the right to occupy the space.
Commercial property owners often carry multiple types of insurance to protect themselves against financial loss in the event of an unforeseen event. As a condition of the lease, tenants are commonly billed for their proportional share of the insurance cost for the roof and structure of the building they occupy. Most leases will go further, stipulating that tenants maintain a policy on their rental space and its contents. Imagine a scenario where the tenant’s inventory is stolen or damaged. If the tenant’s business is interrupted, both parties are left injured.
If the property is sub-metered, the tenant may pay for all the electricity, natural gas, water, and sewer they consume. In the absence of a submeter, tenants generally pay their pro-rata share. In Massachusetts, we have some of the highest electricity rates in the county.
A retailer’s inventory, a manufacturer’s CNC machine, or a hair stylist’s blow dryer at a hair salon are all forms of tangible property. These “contents” are subject to personal property taxation unless exempt by statute.
In a multi-tenanted property, parking lots, elevators, lobbies, hallways, and amenity spaces are owned collectively by business owners, staff, and customers alike, the cost of maintaining these spaces must be shared, generally on a pro-rata basis. Like other elements of the cost of occupancy, tenants pay a proportional share of the property taxes based on the percentage of square footage they occupy. For example, if they occupy 1,000 SF in a 10,000 SF building, a tenant would be billed for 10% of the property tax bill.
If a tenant wishes to customize or improve their commercial real estate space before moving in, they may have to pay for some, or all of, the cost associated with doing so. In some cases, a property owner may offer a “TI (Tenant Improvement) Allowance” to the tenant as part of their commercial lease terms to help offset this cost.
In the case of Price Chopper, three elements tied to the cost of occupancy, present major challenges to consummating a deal:
- Differentials in property assessed value
- Size and configuration of the space
- Business terms
The difference in the assessed value of the property they currently own versus the Price Chopper where they would be tenants. Due to an $8 million difference in the assessed value, they would be required to pay an additional $20,183.80 per year or $4.79 per square foot in property tax alone for the same amount of square footage.
As is currently configured, the Price Chopper is 67,000 square feet. Request For Proposals (RFP) were provided consisting of two configurations, in one, with 27,000 square feet, and in another, 40,000 square feet. Whichever the two parties might mutually agree upon, there is a cost that must be absorbed by the landlord, prospective tenant, or some combination of the two over the life of the lease.
Few tenants pay closer attention to their co-tenants than retailers. In this case, the prospective tenant sought to have the landlord fill the remaining leasable square footage to complementary uses like a bank, barber shop, nail salon, or dry cleaner. All else being equal, grouping these types of businesses tends to increase the drawing power of a shopping center and revenue for the tenants while lowering the risk of foregone lease payments to the landlord.
Ultimately, the challenges surrounding commercial tax rates and occupancy costs highlight the financial burden placed on small businesses in Worcester. Many commercial leases, including those being considered for the Price Chopper site, operate under a triple net lease (NNN) structure. In this type of lease, tenants are responsible not only for base rent but also for property taxes, insurance, and maintenance costs—further increasing their financial obligations. This arrangement, while common in commercial real estate, can make it difficult for smaller businesses to compete with larger corporations that have the resources to absorb these expenses. If Worcester hopes to attract and retain independent businesses, city leaders must find ways to create a more balanced and competitive tax policy that fosters sustainable growth while maintaining affordability for entrepreneurs.
