How To Calculate Commercial Rent On A Monthly and Annual Basis?

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how to calculate commercial rent

How To Calculate Commercial Rent On A Monthly and Annual Basis?

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how to calculate commercial rent
Home » Real Estate Concepts » How To Calculate Commercial Rent On A Monthly and Annual Basis?

Calculate Commercial Rent

Commercial leases are the new best friend of any physical business. Instead of purchasing a commercial space or renting it on a monthly basis, you can draw up an ongoing contract that serves both the lessor and the tenant greatly.

Most people are daunted by the commercial rent calculation for commercial property and this is mainly because of the variables associated with it. Based on whether you have a Net lease, a double net lease, a triple net lease, a gross lease, or a percentage lease, the monthly rent varies.

Hence, today we will discuss the variables that you need to consider and the types of commercial leases that affect the rental rate. You will see how much simpler the whole rent calculation process can be based on the rental properties you choose.

Read also – Types of Commercial Leases in The Real Estate

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What are the different types of commercial real estate that you can acquire on a lease?

There are a number of commercial tenants who prefer renting the entire building, however, some opt for specific units. A tenant pays the rent amount based on the total square footage, the common area that they utilize, and in the cases of an NNN lease, the insurance and property taxes for said commercial space.

Here are a few types of commercial rental properties that you can acquire:

  • Retail space
  • Office space
  • Shopping malls
  • Strip centers

The gross lease for each of these rental properties relies on the type of lease agreement you have with the property owner. For instance, in case of NNN, the rental amount will be lower but you will have to pay for repairs, common area maintenance, property taxes, property insurance, and additional charges separately.

However, if you have a full-service lease then your base rent will be inclusive of all these charges. Therefore, if the costs are more, then you are not obligated to pay huge additional charges.

Read also – What is a Commercial Lease Agreement?

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How is commercial lease calculation undertaken to decide the monthly rent?

The commercial tenant and building owner will have to agree upon the type of lease agreement and the charges that are included and precluded from the monthly rent.

1. Rent based on usable square feet

Often, owners and tenants come to an agreement about the base rental rate depending upon the type of tenant’s business plan and the load factor. They subsequently determine the actual amount for the rent based on the usable square footage available in the commercial space.

There are two types of commercial rent calculations based on the rentable square feet:

a) Annual rent

It is calculated based on a simple equation of rentable square footage multiplied by each unit of usable square feet available.

For instance, if the price per square foot is $10 and the total square footage of the unit is 1000 square feet then the gross rent would be $10 x 1000 = $10,000.

Large businesses and successional business models find it easier to subscribe to an annual rent as it is a one-time payment which makes it simpler to determine their yearly profits. Additionally, tenants can negotiate a fully-serviced lease for an annual rent because they pay a lump sum amount to the property owner.

Read also – What Is The After Repair Value (ARV)?

commercial rent calculation formula

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b) Monthly rent

It is calculated by dividing the annual rent by 12. Therefore, leading with our example of $10 as rent per square foot of the property and a 1000 square feet commercial space, the rent would be calculated as $10,000 / 12 which is $833.33 per month.

Small and new businesses find this to be more beneficial because their business models are uncertain. If the tenant’s business goes under, they can simply terminate the contract and get their security deposit back. If they have a clause wherein the building owner charges a certain sum for early termination, then they can calculate this amount based on the lease terms of the commercial agreement. Just subtract the percentage of money from the total security deposit.

These lease agreements usually mention additional operating costs and maintenance for the lobbies, restrooms, and the occupancy of the building’s common spaces in general. The tenants must bear these additional costs but they can work out an agreement wherein the common area maintenance and operating expenses for the facilities are shared by all the tenants in the entire building, or at least the ones on their floor.

2. Percentage rentals

Another type of contractual agreement is where the property owner is entitled to receive a percentage of the tenant’s business profits. If the location of the commercial space receives a lot of foot traffic and poses an opportunity for growing revenue then the share of these percentage rents will be higher.

In other words, the owners receive a base rent for the commercial real estate but they also receive additional income as a bonus for allowing the tenants to utilize prime locations.

Read also – Best Commercial Interior Design Ideas

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There are two distinct methods of calculating a percentage rental rate:

a) A percentage over a certain base profit

In these percentage rental rates, the owners devise a rental plan that includes base rent and a percentage of the profit above a certain amount.

Simply put, it is base rent plus an additional percentage on the total profit if the tenant’s business makes more than a predetermined revenue.

Let’s assume that the commercial rent of the property is $300 per month and the owner has specified a base profit margin of 10% over $10,000 in business profits. Therefore, if the business makes 25,000 in gross profits then the calculation would be,

300 + (25,000 – 10,000) x 10%.

So, the tenant pays an additional 10% for the $15,000 extra profit they earned. Thus, the total commercial rent for that month would be $1800.

b) A percentage of the gross profit

Another method of percentage rental rate is when the owner specifies that the tenant must pay the base rent and an additional percentage of their gross profit, regardless of how much they make.

Therefore, using the previous example, the commercial lease calculation would be,

300 + 10% x 25000 = $2800, wherein the base amount of $10,000 is not included in the calculation. The tenant pays a percentage of their gross profit. Even if it was $250 then they would have to pay $25 as additional lease payments.

Conclusion

You see, the commercial lease calculations are actually easy when the terms of the lease clearly specify the method of payment and the percentage rental. If you have to pay the property taxes, maintenance costs, and property insurance as required by net lease agreements, they will be incurred separately.

Therefore, you need not worry about them while calculating your commercial rent. You simply need to estimate the net usage of utilities and a median cost for additional charges to add to your monthly expenditure on the commercial property.

If you are a small business owner or you’re starting a new business, make sure to go for the rental rate as per square footage available on a monthly basis. Not only is it easier to calculate but in the long run, you will be saving a substantial amount.

If, on the other hand, you have a successional business that will carry on through your legacy or you have a franchise of a chain store, then opt for an annual commercial lease. If you can negotiate a specified amount for more than a year, as in there’s no increase in rent, it is highly beneficial.

If you have a retail space in a shopping complex or an office building, then you’ll likely have a percentage rental system. In any case, calculate the sum beforehand so you know what to expect on your commercial lease agreements.

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