When you think of starting a new business, you probably visualize a cool store, a cozy café, or a bustling office. Your vision is filled with new possibilities and opportunities. But before you can set up a new business space, you need to figure out how much rent you can afford.
Commercial rent is the money you pay for renting a space for your business. It is one of the major expenses of your business, so it is very important to understand how to calculate commercial rent. It is just like having a secret code for your business’s financial success.
In this guide, we will discuss, step-by-step, how to calculate the commercial rent of a property. And how it can help you establish a successful business.
What are the Different Types of Commercial Real Estate for Lease?
Several commercial renters prefer renting an entire building, while some may choose specific units. In the latter case, the renter pays the rent according to the total square footage and the common area they use.
Here is a list of some commercial rental properties that you can get for starting your business:
- Retail Space
- Shared Office Space
- Office building
- Shopping Malls
- Strip Centres
The rent for any commercial property will vary according to the space you occupy and your lease agreement with your property owner.
How To Calculate Your Rent By Square Footage
In the commercial real estate world, the space is measured in square footage. You don’t need to pay for all of it, but you pay for the space you actually use. This space is referred to as Rentable Square Footage.
Let’s find out the rent amount by square footage with an example:
Suppose $30.00 per foot is your annual rental rate (price per square foot multiplied by the square footage gives you your annual rental rate). Your commercial space is 3,000 square feet. What is the commercial rent?
Price Per Square Foot x Total Square Feet = Total Annual Rent Rate
$32.00/ sq. ft. x 3,000 sq. ft. = $96,000 per year
For monthly rent, you can divide the amount by 12.
In California, commercial rents are usually quoted every month.
Usable Vs. Rentable Square Footage
In commercial rental properties, you are quoted on a Usable Square Footage (USF) or Rentable Square Footage (RSF) basis. It depends on the number of renters and the common area space in the property.
USF is the amount of space you can actually occupy and utilize individually. Whereas RSF also adds to the common areas that all renters can access and maintain.
RSF is calculated by considering the total square footage utilized by renters and then dividing it by the total square footage of the commercial property.
For example, an office building has an area of 120,000 square feet with 20,000 square feet of common area (restrooms, lobby, hallways, etc.) gives a 16.7% common area factor.
Your common area factor, which determines each renter’s share on a pro-rata basis, is then used to calculate RSF. Refer to the example mentioned above.
3,000 Usable Square Feet x 16.7% Common Area Factor = 501 Square Feet of Common Area
501 square feet + 3,000 Usable Square Feet = 3,501 Rentable Square Feet
In the case of RSF, renters are responsible for paying rent for their share in the common area.
So, now, $32.00 per square foot would be multiplied by the total RSF to calculate the annual rent.
3,501 RSF x $32.00 per square foot = $112,032 per year or $9,336 per month
Most retail renters occupy their space individually (unless they are in a shopping mall and share bathrooms, hallways, etc.). So, RSF is common in office buildings.
Understanding the Lease Structure
Property owners and renters need to understand the lease structure well. Commercial lease structures are usually more complex than residential lease structures. There are three types of commercial lease structures, as explained below:
1. Triple Net (NNN)
Usually, triple net leases are provided as ‘base rent + additional rent.’ Renters are liable to pay the base rent and their share of common area maintenance, taxes, and insurance. The NNN expenses are quoted based on square footage.
You might be quoted $32.00 per square foot NNN with an estimated $3.00 per square foot in NNN expenses. These expenses are charged as the annual estimate of the property maintenance. The amount may change every year.
Triple net lease structures are usually considered in retail properties, where renters are entirely responsible for their utilities.
2. Full Service Gross (FSG)
Full-service gross lease structures are quoted on an ‘all-in’ basis, i.e., the rent includes everything, and the renters are not responsible for paying any extra amount.
The renters will pay one fee, and then the landlord is responsible for paying all the common area services like maintenance, taxes, insurance, and utilities.
You might be quoted $32.00 per square foot full-service gross. These lease structures are common in office properties.
3. Modified Gross (MG)
Modified gross is a hybrid of triple net and full-service gross lease structures. Property owners can pass on any number of expenses in this structure, such as common area maintenance, utilities, janitorial, etc.
You might be quoted $32.00 per square foot modified gross, including janitorial. In this case, the renters are responsible for using and paying for the janitorial services within their housing area.
BFPM: Your Trusted Partner for Commercial Real Estate
If you plan to rent a commercial property, BFPM is here to guide you through the process. Our expert property managers will assist you with calculating commercial rent so that you can make an informed decision. They will provide you with detailed information about the commercial lease structures that are crucial to understand.
At BFPM, we have trusted real estate partners who can help you with a budget-friendly commercial property. So, you can reach us and find a suitable commercial rental property.
Contact us at BFPM for hassle-free commercial property management.
Read our related blog here:
The Ultimate Guide to Corporate Housing: Everything You Need to Know
Trevor Henson
Trevor Henson is an experienced entrepreneur (10+ highly-successful start-ups) and property investor with a demonstrated history of building and leading teams in investment property management environments, maximizing returns for property owners, and optimizing properties through construction management and re-positioning. He…Learn more about how we can help. Customized solutions for large portfolios!