How To Calculate Commercial Rent

Home Real Estate Concepts How To Calculate Commercial Rent

There are numerous methods to calculate commercial rent. It can be complex as well as time-consuming. What type of method to be used often depends on the type of tenant occupying the property?

There are various other  factors that need to be taken into consideration as the state of the financial system or say the economy, business earnings, etc. There are certain situations when a renter is permitted to pay lesser rent payments for the duration when there is reduced income generation. There will also be situations of higher revenue generation due to the flow of demand among the customers.

It all depends on the demand cycle and also the lease agreement signed between the renter and the landlord.

There are various types of commercial rental properties, these include:

  • Shopping malls
  • Strip centers
  • Retail space
  • Free-standing buildings converted into office spaces
  • Professional offices

It becomes really difficult to find good commercial tenants because most businesses organizations who undergo huge success hardly ever change their place of business. Secondly, if the rented property is in a locality that has high foot traffic, the renter would desire to continue its business in the same area for an extended period.

Types of Rent:

There are   types of rent that need to be taken into consideration when one possesses the commercial property and needs to rent it. These lease categories are distinguished generally by the type of renter business acquiring the rented property.

In order to properly understand the whole scenario of various lease categories, one needs to minutely go through the working and calculation process of the various lease type.

Percentage Rent

Percentage rent is one of the best types  of rent category as it is suitable for both the parties i.e. the renter as well as the tenant both. These types of agreements are based on the demand cycle, that means businesses will have profitable as well as loss periods, which might affect the cash flow.

The major factors that influence the demand cycle are:
Firstly, the economy  and secondly the location of the rented property for the business purpose.

In conditions of an inefficient economy,  it is predetermined that businesses will slow down; as a result, it would badly affect the cash flow in the business. Therefore, keeping all such aspects in mind the renter and the tenant signs a percentage rent agreement in which a minimum base rent is decided which can be afforded by the renter even at times of bad months of lower cash flows, and a percentage of the gross income is also decided along with the base rent.

The percentage rent is beneficial for both landlord and the renter because at times of losses, renter can pay the base rent and stay tension free. Whereas a landlord can benefit from the times when business is generating huge profits, by receiving more rents.

One can calculate a percentage lease by two methods:

  • Minimum base rent + percentage over a certain base amount

In this calculation process, the renter will give a predefined minimum base price for monthly rent along with the subtotal of a percentage of total gross receipts on a particular base amount.

  • Minimum base rent + percentage of all gross receipts

These types of calculations are not common, the bottom line revenue of the month is not considered for calculating the percentage. Basically,  the rent is paid on total receipts starting from zero.

Rent Per Square Foot

These types of calculations are beneficial when several renters are sharing a single building. There will be certain common areas that all the renters might be using in common for example the elevators, washrooms, lobbies, hallways, parking space, etc.

The rent payments of such common areas are calculated based on per square foot process and then it is divided accordingly amongst the renters. All the renters will give a portion of the landlord’s costs, particularly for common areas. The rent per square foot is calculated based on a particular amount. These types of rents are generally calculated monthly or yearly.

Commercial rents are subject to adjudication  generally . Commercial renters should calculate the operational expenses to carry out the business to get an idea about the exact amount to be paid on rent every month in order to make profits. Whereas the landlords should keep in mind the total cost of possession before calculating the commercial rent for a profitable deal.

Henceforth, both the parties, the landlord as well as the renter, should adjust to reach a middle point in order sign a commercial rent agreement i.e. a profitable and satisfactory situation for both the ends. Read all the terms and conditions of the lease agreement to ensure that you know about what you are signing .