In the last few days I have had several people ask me about how commercial rents work. Also, I’ve heard a few interesting stories.
Most commercial leases are based on a square-foot rate with some type of cost-of-living increase or a percent of sales over a fixed amount of those sales. This would be a basic example:
You see a space you want, say 1,000 square feet at $70 NNN. The first part is 1,000 times $70 equals $70,000 annual rental paid monthly, equals $5,833 per month.
The second part is what the trade calls NNN. This means the tenant also pays to the landLORD the insurance and taxes related to the space rented.
Also, there is the other N which is CAM – Common Area Maintenance. CAM is your part of outside upkeep, i.e. windows cleaned, snow removal, etc.
As you can see, the tenant basically pays all the expense and the landLORD provides the space. Of course he also has the mortgage. He usually has responsibility of the exterior walls and roof.
Here is a situation I found interesting. You start your business, you work hard and it grows. Say it’s a restaurant with 60 seats. You have been in the space for five years, and your rent continues to increase, but you only have 60 seats.
You control your cost, and as a good businessman, you pass your increases along to your customers. With the increases of rental in Aspen in the last few years, at some point you have priced yourself to the point of becoming overpriced and therefore not competitive in the marketplace.
Your choices are few, but if you had the opportunity to add more space that would give you more seats – you could increase sales. In the above example the landLORD would also receive increased percent of sales.
BUT this is not fiction. The landLORD made a decision to increase rent and not the space that was available in the adjacent area. The outcome on Sept. 15, 2003, is that this established, five-year restaurant will become another empty space in our downtown core.
How about this genius move – a top established restaurant of 19 years wanted to expand into vacant space adjacent to their location, so they requested the additional space. The landLORD’s response was $70 NNN or I’ll just let it sit empty. It’s still empty after two years.
What was lost? The owner estimated the additional space would have created $700,000 additional sales. The city and county lost sales-tax revenue; the local owner lost the opportunity to increase sales and spread their operating cost over greater sales dollars.
Now what did the GENIUS lose. This is a very successful restaurant, and I would assume they meet their base rental, so this would have been on percent, let’s say 10 percent. That’s $70,000 a year times two years, which equals $140,000 and counting.
And last, a 10-year established art gallery’s rent started at $9,500 a month NNN, with a 4 percent annual increase. After 10 years and at renewal time, rent and NNN at $12,000-plus per month, did the landLORD work with this established tenant? No!
Established art gallery out, new tenant in. And guess what the rent is? $8,000! So I would think this LandLORD has gone to the DOGS.