If you’ve ever looked at your rent bill with confusion, you’re definitely not alone. Understanding the math behind your monthly rent dues could be perplexing, especially if you only skimmed over the agreement when you leased the space.
While the calculations are pretty simple, there are a few key provisions of your lease that you need to understand before you can do the math.
The Rental Rate as $/SF/Year
Commercial rent is most often quoted as $ per square foot per year, for example, $30/ SF/Year. In order to derive your actual monthly rent amount, you need to multiply this rate by the square footage of your space, and then divide that number by 12.
Let’s assume you are leasing 5,000 square feet at $30 a foot. These two numbers are all you need to complete the calculation:
$30 x 5,000 square feet = $150,000 per year
$150,000 / 12 months = $12,500 per month
While this example is pretty straightforward, it is worth mentioning that the math would be only this simple for full service leases. When calculating rent dues for triple net leases, you also have to take into account the operating expenses charged by the landlord for the building. But before we review that calculation, let’s take a look at the main difference between the two most common lease agreement types.
Full Service vs. NNN Leases
Full service lease tenants pay a rental rate, which already factors in the cost of the building’s operating expenses. Even though quoted as one number as in the example above, the rate consists of base rent and an operating expense charge. Some full service leases also feature an operating expense stop, which is the maximum amount the landlord is willing to spend on the property’s operating expenses, and any overages will be charged back to the tenants as a year-end reconciliation.
Triple net lease rental rates, on the other hand, literally cover only the building lease. All other expenses, including property taxes, insurance, and any type of maintenance are paid by the tenants as a separate operating expense rate, also quoted as $/SF/Year, for example, $10 a square foot a year.
Monthly Triple Net Lease Rent Calculation
Let’s assume the rental rate is $25/SF/Y and the operating expenses are $8/SF/Y. To continue with the earlier example, let’s keep the size of the premises at 5,000 square feet. The math will be as follows:
Rent Charges
$25 x 5,000 square feet = $125,000 per year
$125,000 / 12 months = $10,416.67 per month
Operating Expense Charges
$8 x 5,000 square feet = $40,000 per year
$40,000 /12 months = $3,333.33 per month
Monthly Total
$10,416.67 + $3,333.33 = $13,750
Next, we need to add sales tax to this amount. The sales tax rate in Suffolk County, New York, for example, is 4.25%:
Monthly Total with Taxes
$13,750 + 4.25% = $14,334.38
Taking Annual Increases Into Consideration
Most multiyear leases include an annual increase clause, which specifies the percentage or dollar amount by which your rental rate is going to increase each consecutive year throughout the lease term. If, for example, your lease includes an annual increase of 3%, in order to accurately calculate your monthly rent for the second, third, and any consecutive years, you will first need to adjust the rental rate from the previous year by 3%. Then you can follow the calculations as illustrated above.
The example we reviewed covers a very simple, straightforward scenario. In reality, however, each landlord will be offering slightly different lease terms, including what comes with their full service rate, or which services and expenses you will be paying for when leasing triple net space. A tenant representative can help you understand the math behind the various lease types and provisions you may encounter when looking to lease your next location.
Here are a few other articles to check out:
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4 Site Selection Tips When Looking for Office Space
5 Tips When Moving Your Office From Big Cities to the Suburbs
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