You’ve spent weeks looking at commercial space to rent and have finally found the ideal location for your growing business. Before you sign a lease, don’t make the mistake of thinking that the monthly rent per square foot is all you need to know.
Calculating the cost of commercial leases can be complicated, and space can end up costing much more than expected. Here are the most important things to know to calculate your commercial rent.
3 Important Lease Terms to Understand
If you’re leasing an entire building the rental cost is pretty easy to calculate. But most businesses lease a space within a multi-tenant property. This means that, in addition to the actual space, you probably have to pay for your share of the common areas.
Here are three important lease terms to know so that you can accurately calculate your commercial rent:
#1 Rentable square feet
The amount of space the landlord can charge you for. Owners of commercial property often follow the standards set by BOMA (Building Owners and Managers Association International) to calculate the rentable square footage.
#2 Usable square feet
The amount of space you are leasing after deductions from the total square footage are made for space you don’t have access to. Space that isn’t usable, but that you may still have to pay for, includes interior walls and portions of the exterior walls, hallways, and building lobbies.
#3 Building load factor
The percentage of common area space in the building that is factored into your lease payment. For example, if a 100,000 square-foot office building has a 10,000 square-foot lobby, the load factor is:
- 10,000 sq. ft. lobby / 100,000 sq. ft. building = 10%
This additional square footage is added onto your lease. So, if you lease a 1,000 square-foot space in a building with a 10% load factor, the total square footage you’ll be charged for is 1,100 square feet.
Types of Commercial Leases
Now that we know these three important lease terms, let’s take a quick look at the most common types of commercial leases:
Triple Net (NNN)
The three ‘nets’ of a triple net lease are: property taxes, property insurance, and common area expenses (sometimes called CAM or common area maintenance). With a NNN lease you’ll pay a base rent plus all of the triple net extras. So, if you have a 1,000 square-foot space that rents for $8 per square foot per year and the NNN fee is $4 per square foot per year, your commercial rent with a NNN lease would be:
- 1,000 sq. ft. x ($8/sq. ft. per year + $4 NNN/sq. ft. per year) = $12,000 per year or $1,000 per month
Modified Gross (MG)
Modified gross leases don’t include all the NNN fees. The only additional charge you pay for with a MG lease is utilities. For example, if you’re renting a 1,000 sq. ft. space and the modified gross rent is $10.00 per square foot per year, your rent would be:
- 1,000 sq. ft. x $10/sq. ft. per year = $10,000 per year or $833.33 per month + utilities
Full Service Gross (FSG)
Full service gross leases are basically the rent paid for occupying the space. The landlord covers all property operating expenses, including taxes, insurance and utilities. If the size of the space you’re renting is 1,000 square feet and the rent is $12 per square foot per year, then your commercial rent is:
- 1,000 sq. ft. x $12/sq. ft. per year = $12,000 per year or $1,000 per month
Percentage
Percentage leases are usually used for renting retail space in a large shopping mall or for anchor tenants in a large commercial property. A percentage lease has a lower base monthly rental fee but also collects a percentage of your gross monthly sales.
For example, if you’re renting a 10,000 square-foot space with a base rent of $5 per square foot per year and the landlord collects 1% of your gross sales above $50,000 per month, your commercial rent on a percentage lease would be:
- 10,000 sq. ft. x $5/sq. ft. per year = $50,000 per year or $4,167 per month
- $120,000 in gross sales per month – $50,000 = $80,000 x 1% = $800
- Total rent on a percentage lease: $4,167 + $800 = $4,967 per month
Steps to Accurately Calculate Your Commercial Rent
Here are the steps to follow to accurately calculate your rent on a commercial space:
- Determine the square footage you’ll actually be charged for
- Determine the base rental rate
- Determine any ‘extra’ rental rate such as NNN fees, MG fees, or your percentage of gross sales
- Add everything together to calculate your total rent rate
- Multiply your total rent rate by the square footage charged by the landlord
- Divide the total by 12 to calculate the total monthly cost of your commercial rent
Commercial Rents Are (Almost) Always Negotiable
Calculating a commercial rent can be complicated, and if you’re not careful you could end up paying more for your lease than expected. That’s why it’s important to understand the actual square footage you’ll be charged for along with any extra fees like CAM, utilities, property taxes or insurance.
The good news is that commercial rents are almost always negotiable. While you want to keep your business profitable and growing, building owners have their operating costs in mind. When you’re negotiating your commercial lease, aim for a middle ground that’s a win-win for both you and the landlord.
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