How to Calculate Commercial Rent [Everything Business Owners Need to Know]
Today, I’m going to show you everything you need to know on how to calculate commercial
rent.
And since every lease is different, meaning all rents are calculated differently, we’re
going to cover the difference between usable and rentable square footage, the different
lease structures and their impact on rent calculations, and be sure to stick around
until the end where I’ll give you a calculator to help you figure out your rent.
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Commercial real estate, much like other industries, is rampant with its own unique lingo.
Words like “triple net” and “cap rate” are thrown around as if they’re common knowledge,
but if you’re not in commercial real estate, you likely won’t be able to keep up with
the various terms.
And calculating commercial rent can be just the same.
When a commercial real estate broker or property owner tells you that their property is “$32.00
per foot, triple net,” what does that actually mean?
Wouldn’t it be easier if rent was just given on a total monthly amount instead of per square
foot? Well, yes and no.
Commercial rents are calculated on a price per square foot basis because, more often
than not, spaces may be divided or combined. These numbers give industry professionals
a quick snapshot to compare rent prices among various properties. After all - $5,000 per
month doesn’t tell you how big the space is or what is included in the base rent.
Here’s The Math behind Calculating Your Rent By Square Footage
In Nashville, where I’m based, and throughout most of the country, commercial rents are
quoted on an annual basis. Other parts, like California, may quote rents
on a monthly basis.
Let’s take our previous example of $32.00 per foot, which is your annual rental rate.
If your commercial space is 3,000 square feet, here’s how to calculate your rent:
Price Per Square Foot x Total Square Feet = Total Annual Rental Rate
So, you multiply the price per square foot by the square footage and that will give you
your total annual rental rate.
For example: $32.00 / sq. ft. x 3,000 sq. ft. = $96,000 per year
Divide that by twelve for your monthly rental rate of $8,000.
While it may now seem easier to calculate your monthly rental rate, it can actually
get far more complicated. ------------------------------------------------------------
Usable Vs. Rentable Square Footage
Depending on the amount of tenants and common area in the property, you may be quoted on
a Usable Square Footage (USF) or Rentable Square Footage (RSF) basis.
Usable Square Footage is the amount of space that you, alone, can 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 shared by tenants and dividing it
by the total square footage of the property.
An office building, for example, may be 120,000 square feet with 20,000 square feet of common
areas ( such as lobbies, hallways, restrooms, and more.), which gives it a 16.7% common
area factor.
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. Per our example above:
3,000 Usable Square Feet x 16.7% common area factor = 501 square feet of common area
You would add that 501 square feet of common area to your 3,000 Usable Square Feet, which
gives you 3,501 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 $32.00 per square foot would be multiplied by the rentable square
footage to give the tenant their annual rent.
3,501 RSF x $32.00 per square foot = $112,032 per year or $9,336 per month
Since most retail tenants (unless they’re in an indoor shopping mall and share hallways,
bathrooms, and so forth.) are the sole occupants of their spaces, rentable square footage is
more common in office buildings. By the way - I’m using $32.00/sf because
that’s right around where new retail space is available for lease in Nashville. What
does commercial space cost to rent in your market? Let me know in a comment below!
------------------------------------------------------------------ But that’s not everything that could impact
your rent calculations.
You also need to understand The Structure of the lease.
Unlike residential contracts and forms, which have largely been regulated and standardized
by the National Association of Realtors, every commercial deal is different.
However, there are three primary types of commercial lease structures.
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Triple Net (NNN)
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.
You might be quoted: $32.00 per square foot NNN with an estimated $3.00 per square foot
in NNN expenses.
These 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 and not a profit center for
the landlord.
Triple net lease structures are most common in retail and tenants are responsible for
their own utilities.
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Full Service Gross (FSG)
Full Service leases are quoted on an “all-in” basis.
Tenants are not responsible for any expenses above and beyond this quoted rate.
The landlord collects one fee and is responsible for paying common area maintenance, taxes,
insurance, utilities, and any other expenses associated with the property.
With this lease structure, you might be quoted: $32.00 per square foot full service.
These lease structures are most commonly found in office properties, but can be utilized
on any type of commercial real estate.
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Modified Gross (MG)
Modified gross leases are often a hybrid of a triple net and full service lease.
Landlords may pass on any number of expenses in a modified gross lease, such as utilities,
common area maintenance, janitorial, etc.
You might be quoted: $32.00 per square foot modified gross, net of janitorial.
In this scenario, the tenant would be responsible for janitorial services within their suite.
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As you can tell, there are many different ways of calculating commercial rents per square
foot based on the type of property, lease structure, and even which part of the country
you live in.
We definitely recommend you have an attorney alongside your commercial real estate broker
to help you navigate through the leasing process.
If you’re looking for that lease calculator, I’ve left a link to it in the video description
below.
So, there you have it for how to calculate commercial rent.
If you liked this video, please give it a thumbs up. If you have any questions, feel
free to leave me a comment below and I’ll be sure to get back with you. And if you’re
interested in more commercial real estate investing strategies, leasing tips, and market
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