Jun 10, 2013
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Commercial Rental Rates and Expenses|Who Pays for What?

There are a number of factors that comprise commercial rental rates and several customary ways to quote rents, which can make it difficult to understand what people mean when they are discussing leasing rates.

Normally, the rate quoted reflects the amount of rent you pay per square foot. Generally square foot prices are quoted on a monthly basis; however, there are markets such as San Francisco that are quoted on an annual basis. For example, a $36.00 per square foot annual rate is equal to $3.00 per square foot when expressed as a monthly rate. While this is simple math, it can come as a bit of a shock when you hear a rate quoted for one space as $3.00 per square foot and another as $36.00.

Urban office leasing is generally quoted as an annual rate, while industrial and retail rates are typically stated as monthly rates.

Also important to note is that real estate brokers commonly refer to annual square footage rates while tenants frequently prefer to look at rates on a monthly basis. This difference may occur because each uses the rate differently. Tenants commonly look at their expenses from a monthly expense perspective, while agents deal in leasing agreements in annual terms.

Another thing to note is how square footage is defined. It can be quoted to you on a rentable or useable basis. If you see it on a useable basis that means that the square footage is the actual square footage in your space. If you see it on a rentable basis, it usually means that there is a load factor involved and your square footage includes your portion of the load factor.

The load factor is the multiplier applied to a tenant’s useable space that accounts for the tenant’s proportionate share of the common areas (restrooms, lobbies, stairwells, mechanical rooms, etc.). Rentable basis is useable square footage plus the load factor. You may also see the load factor referred to as the add-on factor.

Aside from different rental rate terms, there are key attributes associated with each square footage rate.

These attributes are most commonly referred to as: Full Service Gross, Industrial Gross (or Single Net), Double Net and Triple Net (or Absolute Net).

All of these except the Full Service Gross rent may have Common Area Maintenance (CAM) charges added on.

On property fact sheets you may see these written as; FSG, IG, N, NN, NNN, CAM. These traits determine who pays the utilities, janitorial and other building services (elevators, common hall lights, etc.) and are key factors in determining the true asking rate.

A Triple Net Lease (NNN) means that the tenant pays for all expenses on the property. The three nets (NNN) refer to Real Estate Taxes, Insurance and Common Area Maintenance. In addition to the NNN costs, the tenant pays for his own utilities and janitorial. The Landlord is not responsible for any costs associated with the property, except for possibly some structural and original construction issues.

A Double Net Lease (NN) means that the tenant pays for the real estate taxes and insurance on the property and the Landlord pays for the common area maintenance. Utilities and janitorial are negotiated items with the lease being your guide. The Landlord typically is responsible for structural and original construction issues.

A Net Lease (N) means that the tenant pays for the real estate taxes and the Landlord pays for the insurance and common area maintenance. The other costs are the responsibilities of the parties similar to the NN lease.

Another lease that you might run into is where the tenant pays the increase in expenses over a base year. The expenses can be all of the expenses of the property or may be some of the expenses of the property. The lease will spell out the responsibilities of the parties.

Retail tenants may also be subject to a percentage rent that requires the tenant to pay a percentage of the gross sales after deducting the minimum rent. The formula is gross sales times percentage rate less minimum rent equals the amount of percentage rent due. Example – Gross Sales are $1,000,000, Percentage Rate is 7% and minimum rent is $60,000 per year. $1,000,000 times 7% equals $70,000, minus minimum rent of $60,000 equals percentage rent owed of $10,000 ($70,000 minus $60,000). You may also see this quoted as 7% of sales over a natural break even point. To calculate the break even point you divide the minimum rent ($60,000) by the percentage rate of 7% giving you a break even point of $857,143. This means that if you do a gross volume less than $857,143 you will not owe any percentage rent, but if you do a volume greater than $857,143 you will owe some percentage rent equal to 7% of any amount over the break even point.

Rental rates, in essence, are affected by countless elements, including:

• lease term (duration)
• size of the property
• storage
• views
• proximity to certain locations
• current market/economy.

Typically, items that will help to lower your rental rate include longer lease terms, good credit history, previous experience, larger size property, inferior location within a market or a particular property, lower level of a high rise building and a down real estate market. Typically, things that will increase a rental rate include improving market conditions, short term leases, bad credit, little or no experience, smaller properties, superior locations in the market or a particular property and higher floors of a high rise building.

Once a lease is executed, the rental rate is fixed for the lease term, however be sure to take into account the increases in the expenses that you are responsible for paying.

As you can see there are several factors you need to take into account prior to looking for a location in the market. If you have any questions or I may be of assistance in any way please feel free to contact me. Always remember that my way of giving back is to give away my knowledge. Thank you for reviewing this article.