Calculating Commercial Real Estate Rent. An E-book Prepared By:

Transcription

1 Calculating Commercial Real Estate Rent An E-book Prepared By: For more information please contact us at O Donnell Commercial Real Estate, Inc. provides product and tenant representation of office, medical, industrial, retail, investment, and land properties throughout the Chicagoland area.

2 Table of Contents I. Net Rent vs. Gross Rent II. Various Types of Net Rent (Single, Double, or Triple) III. The Difference Between Rentable and Usable Square Footage IV. Calculating Monthly Rent V. Additional Monthly Expenses to Consider VI. Factoring in Rental Abatement Page 2 of 8

3 Net Rent vs. Gross Rent Most commonly commercial real estate rent is quoted on a per square foot (PSF) basis in either Net or Gross numbers. This PSF is the cost of rent for an entire year. If a rent is quoted on a net basis, this number does not include the tenant s pro-rated responsibility of taxes or common area maintenance (known as CAM). The CAM includes any work that is completed in the common area on behalf of the tenants of the building. For instance, the snowplowing of the parking lot and sidewalks, landscaping of the exterior, insurance for the building, and cleaning of common areas (lobbies, bathrooms, hallways, etc ). Each tenant is responsible for these charges passed on by the landlord. Gross rents on the other hand already include these numbers as the landlord pays for them directly. Therefore, you may have a higher rent on a gross basis but this will include your total monthly responsibility, meanwhile your net number may be smaller but does not give you a clear picture on your budget. This is not to say gross rents are always more expensive than net rents. To prove this point, we can run a search of comparable properties in a particular area. You ll see higher net rates than gross rates, and vice versa. Page 3 of 8

4 Various Types of Net Rent (Single, Double, or Triple) In the previous chapter we discussed the difference between gross and net leases, however, did you know there are a variety of Net leases? You may be curious as to what those N s mean after the rental price listed. Well, these N s could mean quite a difference in how much rent you pay. Here is a brief run-down of net leasing: Single net or N leases: the tenant pays the basic monthly rent plus property taxes (just one N). The landlord or property owner pays operating expenses (also known as common area maintenance or CAM) and property insurance. Double net or NN leases: the tenant pays the basic monthly rent plus property taxes and property insurance (two NN s). The landlord or property owner pays operating expenses. Triple net or NNN leases: the tenant pays the basic monthly rent plus property taxes, property insurance, and operating expenses (all three N s). As a refresher, full gross leases mean that the landlord or property owner pays the property taxes, property insurance and operating expenses. This leaves the tenant only responsible for their base rent. In the Chicagoland area we typically see gross leases or triple net, rarely single or double net leases. But it is still very important to pay attention to how the rental rate is listed as this could mean a significant difference in annual rent. Page 4 of 8

5 The Difference Between Rentable and Usable Square Footage Every commercial real estate transaction is priced on a PSF (Per Square Foot) basis and defined in total square feet versus a residential transaction that look at number of rooms and other defining characteristics. Although this may seem pretty cut and dry there are actually two types of square feet that are referenced in common commercial real estate transactions: RSF (Rentable Square Feet) and USF (Usable Square Feet). Understanding the difference between RSF and USF can mean a monumental cost savings in the long run-as the two numbers can vary anywhere from 3% to 20%. USF refers to the square footage the tenant actually can use in their office space. This space can be looked at as the private space a tenant uses to host its business, equipment, furniture, and personnel. On the other hand, RSF refers to everything the USF includes, plus common areas of the building such as restrooms, hallways, elevator shafts, stairwells, etc Therefore this number will be higher than USF which thus begs the question: Are offices usually quoted on a RSF basis or a USF basis? Unfortunately there is no clear cut answer to the question, as there is no rule as to which needs to be quoted (in USF or RSF). As a tenant representative, it is our job to inquire how the rate is quoted so there are no surprises later. Obviously if the square feet vary 3% to 20%, so does the rental rate. Tenants are charged for the RSF as they do in fact use these common areas. Other ways this is identified is the load factor or loss factor. Sometimes owners will say the loss factor is 10%, which means 10% of the building is taken up by common areas. This also means that if you are renting 1,000 USF, you will be paying for 1,100 total rentable square feet. In a typical single story, private entrance building, offices can have at the low end a 3% load factor. This is due to the fact there is normally less common areas (no hallways, elevators, lobbies, etc ) and merely mechanical/sprinkler rooms. On the other end, multi-story offices can have a 20% higher RSF due to the lobbies, atriums, elevators, common washrooms, etc Page 5 of 8

6 Calculating Monthly Rent To find out your monthly rent, you ll take your gross rent (or your net rent plus taxes, CAM, and insurance) and multiply that by the number of square feet you rent. Remember to multiply by the RSF not the USF. This will give you your yearly rent expense, which divided by 12 will allot you your monthly rent. Let s say the rent is $10.00 PSF Net with taxes at $2.00 PSF and CAM and Insurance at $3.00 PSF. Therefore, your total PSF expense is $ Now let s pretend you are renting 2000 USF. The loss factor is 10%, meaning your RSF is x $15.00 = $33,000 yearly rent expense or $2,750 monthly rent expense when divided by 12. Now, let s say that you didn t know to ask the difference between Gross and Net or Rentable and Usable, so you assumed your rental rate was $10 PSF and you rented a total of 2000 SF. Your yearly rent would be $20,000 and your monthly rent would be $ That s a difference of $1,083 a month!!! We are pretty sure you would be shocked when you receive your first rental invoice and saw that your rent was almost double of what you originally thought. The moral of the story is to have a knowledgeable advocate in your corner to ask all the necessary questions. Page 6 of 8

7 Additional Monthly Expenses to Consider When leasing space it is important to take a good look at what the CAM includes to better outline the additional monthly expenses you ll be accountable for. Most often you re space will be separately metered for gas, electricity, and of course, cable/internet. Some spaces also charge monthly for water or garbage disposal. Depending on the type of space you rent, you may also have to pay for landscape maintenance and snowplowing. Most often this would be at a freestanding property where you are the single tenant. Additionally, most property owners will require proof of insurance for certain thresholds to cover their building. Obviously they have insurance on the property in general, but the tenant insurance covers incidentals not listed in the owner s policy. The property lease will call out the exact terms necessary for the tenant s policy, but if you would like to cost this out prior to lease terms, the owner should be able to provide this for you. Most tenants don t find this to be anything out of the norm and probably already have the coverages needed, but it is important to discuss as it could potentially affect monthly expenses. Page 7 of 8

8 Factoring in Rental Abatement The last item to discuss is rental abatement. Most often a certain time of abatement will be given to the tenant by the landlord in order to incentivize them to lease space. Different areas and property types, as well as necessary tenant improvements and lease terms, all play a factor into how much abatement is given. Therefore there is no cut and dry rule of thumb. Once a property is chosen, your real estate broker can advise you as to what they think you should ask for in abatement. So what is this abatement then? Basically it is free rent. However, you must ask whether it is net abatement or gross abatement. Net abatement is most common and means the tenant is still responsible for their share of CAM, taxes, and insurance. Meanwhile gross abatement is completely free for tenants. Let s say a landlord offers three months of net abatement on a three year lease. This means that for three months of the rental period the tenant will only pay the CAM, taxes, and insurance for the space. Most often this will be the first three months of the lease term. However, it can be negotiated to be spread throughout the lease. For instance the first month of each lease year will be net free. Often times it is longer abatement periods that will be spread out through the lease term. Page 8 of 8