By James Kimmons. Real Estate Business Expert
Jim Kimmons has many years of experience as a real estate agent and broker in three states, and serves as a consultant to other real estate professionals on using technology to improve their marketing and office management.
Commercial and retail leases use various rental pricing methods. The decision as to which commercial lease calculation method to use is frequently related to the type of tenant business. It could also have to do with the economy, balancing a need to retain an occupant with their ability to pay based on their business revenues.
Economies change, and sometimes commercial leases provide a much better return than residential lease property.
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Investors with only residential single family rental property experience often hesitate to get into commercial leasing, as it is more complicated. It can be well worth the extra education however.
Commercial rental properties include shopping malls, professional offices, strip centers, and free-standing buildings used for offices and retail space. Successful businesses are reluctant to change location unless more space is needed. Capturing a good tenant in an office or retail space can mean years of dependable rental income and positive cash flow.
Depending on the type of lease, the tenant often pays for repairs and improvements. They take care of the property, as they have customers on site. They want them to have a pleasant experience so they'll return. There are very different lease types, and they often are based on the type of tenant business. Let's look at these lease types, how they work, and how they're calculated.
Rent per square foot - Rent is set at $xx.xx per square foot of the leased space. This can be expressed either as an annual or a monthly amount.
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- Example with annual quote: A 2200 square foot office
space is quoted a rent of $11.50 per square foot. 2200 X $11.50 = $25,300 per year for rent.
- Example, same building and rent for monthly amount: 2200 X $11.50 = $25,300 Divide by 12 months to get a monthly rental amount of $2108.33.
Percentage Lease - Retail volume can vary significantly due to many factors, including the economy and also location. For this reason, it is a common practice for a landlord, in their commercial lease calculation. to determine a base rent that they absolutely need, and then to have the tenant pay a percentage of their retail gross income in addition to the base rate. This is logical as, if the location is a good one, then retail sales should rise and enable the tenant's ability to pay higher rent. There are two ways in which the percentage is normally calculated:
- Minimum base rent + percentage over a certain base amount: In this case, the tenant pays a minimum base monthly rent, and then adds a percentage of all gross receipts over a certain base amount. Example: $1000 per month base rent, and 5% of all gross receipts over $50,000 per month. Using one month's gross receipts of $72,000, we do the calculation this way:
$72,000 - $50,000 = $22,000. $22,000 X .05 = $1100. $1100 + base of $1000 = month's rent of $2100.
- Minimum base rent + percentage of all gross receipts: Here, we don't set a bottom line revenue before the percentage kicks in. Rent is paid on all gross receipts from $zero. Example: $500 base rent + 2% of gross business receipts. If we use the previous numbers, we'd take 2% of the entire $72,000 and add that to the base rent, as here:
$72,000 X .02 = $1440. $1440 + $500 = monthly rent of $1940.