Often, commercial property owners divide up warehouses retails spaces, office buildings and other properties to create space for more tenants. In commercial real estate, calculating an exact monthly lease payment for numerous divisible costs would be rather annoying. Therefore, landlords usually advertise available space in terms of ($) rate per square foot per year ($/SqFt/Year).
The $/SqFt/Year formula simplifies the calculation for both parties because it make clear the value of the space based on the number of square feet allocated to the tenant. To help negotiate better terms, tenants need to understand the basic elements and terminology many landlords employ to determine lease rates for commercial real estate.
Annual Base Rent
To determine the annual base rent (annual fixed rent or annual minimum rent); the landlord multiplies the total square footage (rentable square feet) by the square foot rate. The rentable square feet include the usable space for the tenant plus a percentage of the lobby, elevators, stairwells, hallways, restrooms and other common areas in the property utilized by all tenants.
For example, 15,000 square feet × $10 per square foot annually equals a annual fixed rent of $150,000 a year. To determine the monthly payment, divide that amount by 12 ($150,000÷ 12 = $12,500 per month).
Percentage Rent
In addition to the annual base lease value, many commercial real estate leasing transactions for retail space allows landlords to collect a “percentage rent.” This provision enables landlords to share in the success of creating and owning a shopping environment. Percentage rent is tabulated based on a small fraction of the tenant’s monthly gross income above what is called a "breakpoint.”
For example, the provision can require a tenant to pay 2% on all gross sales that exceed $125,000 per month If sales from the prior month totaled $135,000, the tenant would pay an addition $200—2% of $10,000.
Gross & Net Leases
The lease type is without question the most important aspect a tenant must consider because it determine how much the lessee pay in rent—in addition to the annual minimum rent and percentage rent (if applicable).
- Gross Lease. In a “Full Service” or “Gross” lease agreement, the landlord has responsibility for all or most usual costs. The landlord passes these expenses on to the lessee in rent as a “Load Factor”—a percentage of the square feet of all common areas.
- Net Lease. A “Net Lease” requires the tenant to pay for their space and for a portion of or all Operating Costs.” These costs refer to the expenses associated with operating, maintaining and using the property, including the following items: taxes, utilities, property insurance, janitorial services, property management fees, sewer, water, and trash collection.
Many tenants negotiate a “cap,” which places a limit on the maximum amount a property owner can increase these charges each year.
- Double Net Lease. A “Double Net” lease requires the tenant to pay all property taxes and property insurance in addition to their portion of usual costs.
- Triple Net Lease. Many commercial real estate agreements are “Triple Net” or “NNN” leases—the lease type that most favors a landlord. The lessee pays a percentage of the common area maintenance (CAM) insurance and property taxes. Example: If a tenant leases 12% of a shopping mall's total leasable space, the lessee pays 12% of the CAM, property insurance and property taxes for then entire property.
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