Defining 'Class A, B, and C' Office Buildings

Q My tenant demands that I agree in my lease to maintain my building as a “Class A” office building. I've frequently seen buildings classified as “Class A, B, and C” in leases, but I'm not clear on what these terms mean. Are there any objective standards that the real estate industry uses to decide whether a building is Class A, B, or C?

A Although leases and real estate professionals often refer to “Class A,” “Class B,” and “Class C” office buildings, there are no objective standards the real estate industry uses to define these terms, says Sacramento attorney Thomas F. Stewart. Rather, the definitions of Class A, B, and C can vary depending on the location of the building. For instance, a Class A building in Cincinnati may not qualify as a Class A building in Los Angeles, explains Andrew D. Ratner of Cushman & Wakefield. Also, local definitions can be general and subjective.

For example, under BOMA International's building classification system, Class A buildings have “high quality” standard finishes and “state of the art” systems, reports law clerk Justin E. Bennett. (BOMA's building classifications can be found on its Web site at: www.boma.org/classes.htm.) But the BOMA classifications don't define high quality finishes or say who decides whether a particular finish is of high enough quality to qualify for Class A status. Also, BOMA classifications don't say what state of the art means. Does the term mean state of the art at the time the lease was signed or state of the art by today's standards? To make matters even more confusing, some real estate boards and brokerage houses have their own definitions of Class A, B, and C buildings. These classifications are often based on variables like the size or age of a building, or the amount of rent being charged to lease space in the building, says Ratner.

Two Ways to Avoid Problems

To avoid any dispute over whether your building meets a specific classification, there are two things you can do:

Avoid using classifications. When spelling out your obligations in the lease, avoid using building classifications altogether, says Stewart. Instead, mention other comparable office buildings in your area, and say that you'll maintain your building by using these buildings as a measuring stick, he advises.

Set your own definitions. If the tenant demands that you agree to maintain your building according to a particular building classification, spell out the definition of the building classification in your lease, says Stewart. You could check with a local brokerage house to get an idea of how building classifications are typically defined in your area, he advises.

Practical Pointer: If you wind up having to define a particular building classification in your lease, don't get too specific, warns Stewart. Otherwise, you may have to update and amend the definition later in the lease term, he says. For example, if you say that your building will feature a certain security system, you run the risk of the system's becoming outmoded—and undesirable—later in the lease term.

Spell Out How Prorated Rent Is Calculated in Lease

Q A prospective tenant wants to rent space in my center beginning on the second day of the month. The rent must be prorated for the remainder of that month. Should I spell out in the lease how I'll calculate the partial month's rent?

A Yes, says New Jersey attorney Marc L. Ripp. Otherwise, you and the tenant could end up battling over which calculation method to use. There are several calculation methods for prorated rent, and each method yields a different result. So the method you choose will affect how much rent the tenant pays, he warns. There are three popular calculation methods:

• Prorating annual rent on a 360-day basis (assuming each month has only 30 days);

• Prorating annual rent on a 365-day basis; and

• Prorating monthly rent based on the actual number of days in the month.

Each of these methods will give you a per-diem rent, says Ripp. Then you'd simply multiply that number by the days remaining in the partial month to determine the rent the tenant owes, he explains.

How Each Method Works

But which is the best method to use? From an owner's viewpoint, the 360-day basis is best, says Ripp, because that will yield the most money for you. Here's an example of how each of the three calculation methods works—and how each method gives you a different result. As you'll see, the tenant will wind up paying the most rent under the calculation method using a 360-day basis.

Suppose a tenant pays an annual rent of $1.2 million for its space. That's $100,000 per month. The lease starts on Oct. 2, 2002. So the tenant would owe rent for only 30 of the 31 days in October 2002. Here's how you would calculate the partial rent under each of the three methods:

360-day basis. If the annual rent is prorated using 360 days in a year, then the tenant would pay you a per-diem rent of $3,333.33 ($1.2 million ÷ 360). Multiplying that amount by 30 (the number of days remaining in October 2002) equals $99,999.90.

365-day basis. If the annual rent is prorated using 365 days in a year, then the tenant would pay you a per-diem rent of $3,287.67 ($1.2 million ÷ 365). Multiplying that amount by 30 (the number of days remaining in October 2002) equals $98,630.10.

Actual number of days in month. If the monthly rent is prorated using the actual number of days in the month (31 days in October), then the tenant would pay you a per-diem rent of $3,225.81 ($100,000 ÷ 31 days). Multiply- ing that amount by 30 (the number of days remaining in October 2002) equals $96,774.30.

CLLI Sources

Justin E. Bennett: Trainor Robertson, 701 University Ave., Ste. 200, Sacramento, CA 95825; (916) 929-7000.

Andrew D. Ratner: Managing Director, West Coast Region, Cushman & Wakefield, Inc., 601 S. Figueroa St., 47th Fl., Los Angeles, CA 90017; (213) 627-4700.

Marc L. Ripp, Esq.: General Counsel, The Gale Company, 200 Campus Dr., Ste. 200, Florham Park, NJ 07932; (973) 301-9500.

Thomas F. Stewart, Esq.: Partner, Trainor Robertson, 701 University Ave., Ste. 200, Sacramento, CA 95825; (916) 929-7000.