How to Calculate Commercial Rent

How to Calculate Commercial Rent

There are a variety of ways of calculating commercial space for rent. Which calculation you use often comes down to the type of tenant business renting out the space. However other factors to take into consideration include business revenue, the state of the economy and so on.

In some cases, a tenant is allowed to pay lower lease payments during periods where they’re expected to make less revenue. This is where the demand cycle comes into play. There will be some months that do better than others due to the ebb and flow of customer demand.

It’s up to the tenant and the landlord to work out a lease agreement that will satisfy both parties.

What types of rental properties can you find?

There are many types of commercial rental properties. These include:

  • Retail space
  • Strip centers
  • Professional offices
  • Shopping malls
  • Freestanding buildings converted into office spaces

Sometimes it can be difficult to find a good commercial tenant. Businesses that have experienced success rarely change locations unless they’ve outgrown their current location. However, if a good tenant shows interest in one of your office rentals (emphasis on good tenant), you can potentially enjoy years of steady, dependable rental income.

In addition, if the space is located in an area with high foot traffic, your tenant will want to continue leasing the location for a long time. The business world is often uncertain, and there’s no guarantee that moving to a new space will allow them to experience the same level of success as they have in their current rental space.

Lease Types

There are various lease types to consider when you have commercial property for rent.In most cases, the lease type is determined by the type of tenant business moving into the office space for rent. Let’s break down each lease type, analyzing how they work and how they’re calculated.

Percentage Lease

Businesses must adhere to demand cycles, meaning they will have their good months and bad months in terms of cash flow. Factors that affect the demand cycle includesthe location of the office space for lease and the economy. If the economy isn’t doing well, for example, there’s a good likelihood that business will slow and cash flow will begin to trend downward for a time.

With these factors in mind, landlords and tenants sign a percentage lease in which the landlord determines a minimum base rent (typically an affordable amount the tenant should be able to work with despite demand cycles), and then have the tenant pay a percentage of their retail gross income along with the base rent amount.

Percentage leases benefit both the landlord and the tenant because during months where business may be slower, the tenant will be able to pay less and stay afloat. On the other hand the landlord benefits because they will receive more rent when business begins to pick up. It’s a win-win for both parties.

You can calculate a percentage lease in two ways:

  • Minimum base rent + percentage over a certain base amount

With this particular calculation, the tenant will pay an agreed-upon minimum base monthly rent, and then add together the percentage of all gross receipts over a specific base amount. Let’s look at an example.

Let’s say base rent per month is $1,200, and 3% of all gross receipts over $45,000 per month. If one month’s gross receipts come out to $80,000 we can calculate the equation in the following way:

$80,000 – $45,000 = $35,000

$35,000 x .03 = $1,050

$1,050 + base amount of $1,200 = $2,250

  • Minimum base rent + percentage of all gross receipts

This calculation is a bit different in that you don’t wait to see what your bottom line revenue is going to be for the month before you calculate the percentage. Essentially, rent will be paid on all gross receipts from zero. Let’s look at an example.

$1,000 base rent + 3% of all gross business receipts. Thus, we would take 3% of the entire $80,000 (using the previous numbers) and add that to the base rent. You can calculate that with the following equation:

$80,000 x .03 = $2,400

$2,400 + $1,000 = $3,400 monthly rent

Rent Per Square Foot

When calculating usable square feet, understand this is the actual amount of space that the tenant is occupying. Rent per square foot is often used when multiple tenants are sharing the same building. Keep in mind there will be parts of the building that both tenants will use such as lobbies, elevators, hallways, bathrooms and so on. These are called common areas.

When it comes to paying rent on the common areas, the number of square feet for these spaces (hallways, elevators, etc.) is typically divided amongst both tenants at a prorated amount. Both tenants will pay a portion of the landlord’s expenses for these shared areas.

When you’re doing a calculation for rent per square foot, rent will be set at a base amount per square foot of the commercial space. You can calculate this amount either monthly or annually.

Annual example: A 2,000 square foot office space has a rent of $12.00 per square foot.

The equation for this calculation is as follows:

2,000 x $12.00 = $24,000 Annually

You can then divide the above number by 12 months to get your monthly rent (example):

24,000 / 12= $2,000 per month

Conclusion

Commercial space rent negotiation can be complicated at times. Business tenants need to know how much they’re spending on operating costs so they know exactly how much they can spend on rent each month while still leaving room for profit. On the other hand, landlords should have their costs of ownership firmly in mind. Therefore, each party should strive to meet at a middle ground where they will both benefit and be happy with the arrangement.

Featured Image Credit: 3dman_eu / Pixabay

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