What are you really paying for retail and office space?
September 2, 2008
A number of factors drive retail and office rents, and there are several ways to quote rates. As a result, it’s sometimes difficult to understand what people mean when they are discussing commercial leasing rates. Generally square foot prices for commercial space are quoted on an annual basis. By example, a $100 per square foot annual rate is equal to $8.33 per square foot when expressed as a monthly rate.
While this is simple math, it can come as a bit of a shock when you hear a rate quoted for one space as $8.33 per square foot and another as $100. Also important to note is that real estate brokers commonly refer to annual square footage rates while tenants frequently prefer to look at rates on a monthly basis. This difference may occur because each uses the rate differently.
Tenants commonly look at their expenses from a monthly perspective, while agents deal in leasing agreements in annual terms. Aside from different rental-rate terms, there are key attributes associated with each square-footage rate. Those attributes are most commonly referred to as: Full Service Gross, Double Net and Triple Net (or Absolute Net); all of these except the Full Service Gross rent may have Common Area Maintenance (CAM) charges added on. These attributes determine who pays the utilities, janitorial and other building services (elevators, common hall lights, etc.), and are key factors in determining the true asking rate. Note that retail tenants also might be subject to a percentage rent that requires the tenant to pay a percentage of the gross sales. Typically this kicks in after the yield of the percentage of gross sales exceeds a certain minimum rent.
Full Service Gross indicates that the asking rate includes all the building services, utilities, janitorial, property taxes, insurance, and common area maintenance. Net generally indicates that the tenant is, at a minimum, responsible for its own utilities, janitorial, in addition to the base rent. The term “net” is so often misused, even by otherwise competent brokers. When you hear the word “net,” think the word “not,” or in other words, something is not included in the rent. You then need to ask this question: “Please tell me all the things I will be paying for that are not included in the rent.” That will be essential in comparing the final cost of leasing one property over another.
Double Net is commonly used in retail leasing or with freestanding, single tenant properties. In this case, the tenant will pay for all the services, the taxes and insurance, plus any systems maintenance while the owner will pay to maintain the roof, foundations and side walls.
Triple Net ” sometimes called absolute net ” also is commonly used in retail leasing or with a free standing, single tenant property. In this case, the tenant will pay for all the services, the taxes and insurance, plus any maintenance to the roof, foundations, side walls, and all building systems.
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To understand the true occupancy costs of a particular space to compare it to a similar space, you should consider doing a present value analysis of the cost of each space under consideration. A present value analysis takes the outward cash flow (i.e. total expenses including base rent, CAM and other costs) for each year of the lease and reduce it to a present value. You can then easily compare the present values of each of the lease options to determine your most economic alternative.