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How to Calculate Commercial Rent!

If someone is asking $25.00/sq ft take the $25.00 X the size of the space 1000 sq ft
$25.00 x 1000 = $25,000.00 (annual rent) divide by 12 to get monthly rent
$2083.33 / month.

Let’s take a detailed look into how to calculate your commercial rent:

A Guide To Understanding Rent Calculations In Commercial Real Estate

Commercial real estate has unique definitions and terms, a lot of this terminology is been created because the industry has so many variables to consider when pricing a deal.

Some simple commercial properties will include most of the costs in the asking rental price like a full service lease where tenants do not have to pay for anything other than the rent quoted, others are divided into rent plus insurance or rent plus taxes and insurance or rent plus taxes, insurance and common area maintenance. Each property is unique therefore each property has to be marketed in different ways. The lingo for this type of situation is Executive Suite, Full Service Lease, Modified Gross Lease, Net Lease, Double Net Lease, and Net Net Net Lease.

What does all that mean? If you are quoted a $/square feet you need to know the square feet in order to come up with a figure.

How To Calculate Your Rent By Square Footage

Taking our example above, $25.00 per foot is your annual rental rate (Price per square foot multiplied by the square footage gives you your annual rental rate).

If your commercial space is 1,000 square feet, here’s how to calculate your rent:

Price Per Square Foot x Total Square Feet = Total Annual Rental Rate

For example: $25.00 / sq. ft. x 1,000 sq. ft. = $25,000 per year
Divide that by twelve for your monthly rental rate of $2,083.33/month.

While this type of calculation makes it easy to calculate your monthly rent but it can be far more difficult

What is Usable vs Rentable Square Footage?

Every site has a different makeup some properties quote on a Usable Square Footage (USF) or Rentable Square Footage (RSF) basis.

Usable Square Footage is the amount of space you, alone, can actually occupy and utilize, while Rentable Square Footage adds in any common areas that all tenants have access to and must therefore maintain.

RSF is calculated by taking the total square footage utilized by tenants and dividing it by the total square footage of the property. Office buildings usually quote this. I personally manage an 18,000 sq ft building with common area of about 17% so when you quote rentable vs usable it’s based on the following: Your common area factor, which determines each tenants’ share of the common area on a pro-rata basis, is then used to calculate Rentable Square Footage.

As Per our example above:
5,000 Usable Square Feet x 17% common area factor = 850 square feet of common area
850 square feet + 5,000 Usable Square Feet = 5850.00 Rentable Square Feet.
In a Rentable Square Footage scenario, tenants are responsible for paying rent on their share of the common areas. So, in this scenario, the $15.00 per square foot would be multiplied by the rentable square footage to give the tenant their annual rent.
5850 RSF x $15.00 per square foot = $87,750.00 per year or $7,312.50 per month

This is calculated mostly on office buildings or buildings that share common areas like hallways, bathrooms, entrances etc.

Understanding The Lease Structure

Unlike residential there is NO standard lease structure for commercial because every building site and tenant need is different with different calculations and terms for each deal. One of the reasons I am so patient about education is because unfortunately in Real Estate, licensing is not separated Residential Vs Commercial. Agents are licensed with one and only one license which does such a disservice to the public. There is a huge education difference much less terms, conditions, lingos, commercial is not regulated like residential and can’t be.
However, there are several types of commercial lease structures.
1. Executive Suites
2. Full Service
3. Modified Gross
4. Net Lease
5. Net Net Lease
6. Net Net Net Lease

All of these different types of leases go from “all in” to tenant shares “all” expenses on a prorated basis.

Executive Suites : I’ve leased the executive suites, when a business needs a satellite office on a temporary basis not knowing if that office will be needed in the future. Executive suites will be “all in” plus shared conference rooms, shared kitchens, internet/wifi, etc.

Full Service : I have leased full service suites in office buildings with common electric meters. Main difference between Executive and Full Service is there are no shared conference, wifi/internet, or kitchens.Modified Gross leases are very common. Tenant pays their own electric and sometimes water, wifi/internet, there is no common anything to share except parking.

Net and Net : Net are not as common but I have done a lease that was two single stand alone buildings on 1 lot. Tenant paid taxes but not insurance and takes care of all maintenance except roof and sewer and structure.

Triple Net : Triple Net is very common especially in Retail Triple net leases are given in a “base rent + additional rent” format. Tenants are responsible for paying their base rent and their share of common area maintenance, taxes, and insurance on the building. These NNN expenses are also quoted on a square footage basis. The NNN expenses are annual estimates for the total maintenance of the property and may change from year to year. Common area maintenance is intended to cover property costs as a pass through expenses from landlord to tenant.

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